Thousands of American fast-food workers went on strike Thursday, rallying for an increase in wages to fifteen dollars an hour, more than double the federal minimum wage. Some businesspeople responded by saying they want to improve wages and working conditions at their companies voluntarily, under the theory that their competitors will have to follow if they don’t want to lose their best workers.
Tom Douglas, the owner of fourteen Seattle restaurants, raised his kitchen workers’ starting wage to fifteen dollars an hour earlier this month, he told National Public Radio. Douglas said he does not believe government should mandate businesses to raise wages—or to require much of anything, really, including sick leave. Instead, he believes the food industry should rely on the magic of the market to provide workers with higher pay.
It’s fashionable, these days, for companies to tout their commitment to bettering society without any need for government involvement. They argue that the market will reward good deeds, so the public sector need not issue mandates. This rhetoric is appealing, but it doesn’t always line up with the facts.
Consider Indra Nooyi, Pepsi’s charismatic C.E.O. Early in her tenure, Nooyi realized that the public would increasingly pressure the firm to make its products healthier. Nooyi argued that a shift toward healthier products would be good for society at large and for Pepsi’s bottom line; John Seabrook wrote about the effort in a 2011 article about Nooyi’s approach.
Nooyi has backed up her rhetoric with concrete steps, acquiring healthier brands like Tropicana and Quaker Oats and creating Pepsi Next, a lower-calorie version of the flagship brand. She even hired a former official from the World Health Organization to oversee the reforms. Initially, Nooyi won wide acclaim for her efforts. Fortune hailed her as the most powerful woman in business five years in a row, and institutions including New York University and Duke University gave her honorary degrees.
However, Pepsi’s investors have long been skeptical. During her tenure, Coca-Cola’s stock price doubled while Pepsi stagnated, even losing its number-two position in the cola market to Diet Coke in 2010. Investors believe that Nooyi’s socially responsible vision is a bad business strategy that diverts resources from Pepsi’s successful, if unhealthy, core brands. Hundreds of millions of new consumers in emerging markets are clamoring to buy Pepsi’s existing products today, calories and all; with Pepsi’s marketing budget spread thin, they are buying Coke instead. Relenting to this pressure on the bottom line, Pepsi last year announced management changes and appeared to signal that it would step back from Nooyi’s “performance with a purpose” business strategy.
The Pepsi case shows that doing good does not always lead to doing well financially, a conclusion supported by decades of academic research. There are a lot of theories about how corporate social responsibility helps companies retain workers, keep them motivated and productive, and boost firms’ reputations, but real-world data doesn’t necessarily corroborate this. Nooyi’s high-profile setback is just another signal to other C.E.O.s about which bottom line matters most.
Companies’ social-responsibility efforts are also likely to be hindered by the important business maxim that “you can only manage what you can measure.” In an effort to make management more scientific, we teach business-school students lots of quantitative skills but offer few tools to measure social impact. C.E.O.s will find it challenging to quantify the benefits of a charitable-giving program or an education initiative. During inevitable downturns in the business cycle, these programs are easy targets for cost savings. That is why corporate philanthropy typically declines in recessions. It’s also a reason the current corporate-social-responsibility craze might not last long.
The only corporate social responsibility that is likely to survive will be activities that the firm should be doing anyway to increase profits. When Walmart requires its suppliers to be more energy efficient, the company lowers its costs. When General Electric champions investments in clean energy, its wind-turbine business benefits. These initiatives are less about corporate social responsibility than they are about business strategy.
The more interesting cases, where C.E.O.s like Nooyi or Starbucks’s Howard Schultz place social impact ahead of short-terms profits, may be difficult to sustain in today’s corporate world. The ruthless focus by investors on quarterly results—and their pressure on C.E.O.s to keep those results in line—gives companies little incentive to continue their focus on social impact when their profits are at risk. As James Surowiecki wrote in early August, fast-food companies have slim profit margins, which makes it especially complicated for them to boost workers’ pay to a level that is capable of supporting a middle-class family. So while Tom Douglas’s employees in Seattle will benefit from their boss’s benevolence, millions of other low-wage restaurant employees have little reason to expect that their employers will follow his lead. It makes sense, then, for them to keep the pressure on their employers, and on the government.
Aaron Chatterji is an Associate Professor at Duke University’s Fuqua School of Business. From 2010 to 2011, he was Senior Economist at the White House Council of Economic Advisers
Photograph by Brian Snyder/Reuters.
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