corporate social responsibility: dealing with political exposure

Corporate Social Corporate Social Responsibility: Dealing With Responsibility: Dealing With

Political ExposurePolitical Exposure An Avenir Suisse Seminar

June 10, 2008Fred L. Smith, Jr., President

Competitive Enterprise Institutewww.cei.org

CEI’s Values Based CEI’s Values Based Communications ProjectCommunications Project

Our Challenge: Make Good Policy Our Challenge: Make Good Policy Good PoliticsGood Politics

Our Question: Just because we’re Our Question: Just because we’re right, do we have to lose?right, do we have to lose?

CEI’s communication work suggests CEI’s communication work suggests the answer should be a resounding NO!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, customers, suppliers, employees, shareholders, suppliers, employees, shareholders, “fence post” neighbors“fence post” neighbors

Political World: Business must communicate in the political world. This audience includes the citizens, the citizens, influential decision-making elites, and influential decision-making elites, and mediamedia

The Two World Challenge

Fencepost Neighbors

Suppliers Employees

Customers

Shareholders

Business

Nexus Community

The General The General PublicPublic




The Two-WorldsThe Two-WorldsCommunication Communication

ChallengeChallenge 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.

AddressingAddressing “Joan “Joan Consumer”Consumer”

Business already communicates benefits Business already communicates benefits to the private world—“Joan Consumer.”to the private world—“Joan Consumer.”

Consumers recognize these benefits and Consumers recognize these benefits and are willing to accept reasonable solutions are willing to accept reasonable solutions when something goes wrong.when something goes wrong.

When speaking to the private world, an When speaking to the private world, an educational communication strategy can educational communication strategy can be effective.be effective.

Addressing “Joan Addressing “Joan Citizen”Citizen”

Approaches effective in reaching the Approaches effective in reaching the private world often are private world often are inappropriate in reaching the inappropriate in reaching the political world.political world.

Education in the political world Education in the political world doesn’t work on a public that is doesn’t work on a public that is “rationally ignorant.” “rationally ignorant.”

Influencing Public Influencing Public OpinionOpinion

The Rational Ignorance The Rational Ignorance ProblemProblem People are busy, spend little time People are busy, spend little time

acquiring information about things they acquiring information about things they can do little about can do little about

Yet, people will have opinions and these Yet, people will have opinions and these will be importantwill be important

But, these opinions will rarely be based But, these opinions will rarely be based on facts or informationon facts or information

Therefore, the rational instinct of Therefore, the rational instinct of business to educate the public will not business to educate the public will not workwork

Rational Ignorance

In the public policy world,In the public policy world,

people aren’t stupid because they’re people aren’t stupid because they’re stupid!stupid!

They’re stupid, because they’re They’re stupid, because they’re smart!smart!

So, when we seek to make people So, when we seek to make people smart,smart,

we’re being stupid!we’re being stupid!

Business’s Dilemma

Rationally ignorant people influence Rationally ignorant people influence important policy issues, which affect important policy issues, which affect businesses’ bottom line.businesses’ bottom line.

Rather than using “the facts,” these Rather than using “the facts,” these citizens focus on how a how they citizens focus on how a how they perceive a decision might serve/hurt perceive a decision might serve/hurt their general values.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 TargetsCommunication 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

Posi

tive

Neg

ati

ve

Barron’s 15 November 1999

Apologies Don’t Work! Apologies Don’t Work!

You can’t apologize your way to respect or to profitability

Variants of ApologeticsVariants of Apologetics Denial - The PhariseeDenial - The Pharisee Bribery - The MafiosoBribery - The Mafioso Martyrdom - Captain HookMartyrdom - Captain Hook

Examples:Apologetics vs. Legitimization

The Chemical Manufacturers Association

The American Plastics Council

Chemical Manufacturers Chemical Manufacturers Assn.Assn.

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.

American Plastics American Plastics CouncilCouncil

The Legitimization The Legitimization ApproachApproach

Extols benefits of product – JOAN Extols benefits of product – JOAN CITIZENCITIZEN

Focuses on safety, health – Shows how Focuses on safety, health – Shows how products make the world fairer, more products make the world fairer, more egalitarian.egalitarian.

Analogous to consumer advertisingAnalogous to consumer advertising

Values-based communication strategyValues-based communication strategy

CEI Focus Group CEI Focus Group FindingsFindings

Apologetic AdsApologetic Ads Raise more doubts than they resolveRaise more doubts than they resolve Viewers focus on unrealized risks – not that Viewers focus on unrealized risks – not that

these risks are being reducedthese risks are being reduced

Legitimizing AdsLegitimizing Ads Raise awareness of virtuesRaise awareness of virtues Makes people concerned about over-Makes people concerned about over-

regulation and potential harm this sector regulation and potential harm this sector (and eventually society)(and eventually society)

Free-Rider ProblemFree-Rider Problem

The “Reverse Halo” reality facing The “Reverse Halo” reality facing businessbusiness

A firm is vulnerable if its competitors A firm is vulnerable if its competitors are vulnerable.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.

ResultsDeadly 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?

CEI FDA AD

CSR in Financial ServicesForeclosures 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


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.


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