Academy of Management

Scandals Fueled the Rise of Corporate Social Responsibility

By Daniel Butcher

The accounting malpractice and executive mismanagement of the Enron and WorldCom scandals pointed to a broader failure in the prevailing corporate culture of maximizing profits at all costs—even if that meant throwing ethics out the window.

Academy of Management Scholar Wendy Smith of the University of Delaware said that after Enron and WorldCom went under due to organization-wide ethical collapses, there was a backlash. In the wake of those scandals, some companies’ forward-thinking leaders tried to form a long-term sustainable strategic vision for brand identity centered on corporate social responsibility (CSR).

“I remember at the time more people talking about the purpose of businesses in the language of social responsibility, asking, ‘What does it mean for a company to be socially responsible?’ Many skeptics said, ‘It’s just not possible; leaders can’t focus on more than one outcome, maximizing profits for shareholders and doing right by all stakeholders,’” Smith said.

In 1970, economist Milton Friedman wrote an article titled “The Social Responsibility of Business Is to Increase Its Profits,” distilling the “Greed Is Good” ethos famously satirized in the 1987 movie Wall Street. In the early 2000s, more people in academia and business alike pushed back, instead insisting that businesses have a duty to be a power for good by improving working conditions, reducing their carbon footprint, participating in fairtrade, and other ways to improve people’s lives.

“Companies like Ben & Jerry’s and The Body Shop challenged the notion that the sole responsibility of companies is feeding more wealth to their shareholders, saying that’s not the case,” Smith said. “And in fact, what we saw when the Enron and WorldCom scandals came along is that, by being so single-mindedly focused on just profit, you actually compromise your ethics and your morals, because all you care about is the bottom line—that narrow, singular focus is so problematic.”

In addition to Ben & Jerry’s and The Body Shop, Smith cited Digital Divide Data (DDD) and King Arthur Baking Company as current role models for CSR.

“What we’ve seen over the last 20 or 25 years now is that people are increasingly challenging the assumptions that the purpose of for-profit companies was only to generate profit and the purpose of nonprofit organizations was to do good in the world and asking how leaders can accommodate competing demands within the same organization,” she said.

“Long-term decision making is so much more holistic, so bringing together these competing demands, while hard for managers to do, is really valuable for the company long-term.”

 

Author

  • Daniel Butcher is a writer and the Managing Editor of AOM Today at the Academy of Management (AOM). Previously, he was a writer and the Finance Editor for Strategic Finance magazine and Management Accounting Quarterly, a scholarly journal, at the Institute of Management Accountants (IMA). Prior to that, he worked as a writer/editor at The Financial Times, including daily FT sister publications Ignites and FundFire, Crain Communications’s InvestmentNews and Crain’s Wealth, eFinancialCareers, and Arizent’s Financial Planning, Re:Invent|Wealth, On Wall Street, Bank Investment Consultant, and Money Management Executive. He earned his bachelor’s degree from the University of Colorado Boulder and his master’s degree from New York University. You can reach him at dbutcher@aom.org or via LinkedIn.

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