The CEO’s Dilemma

Pharmaceutical companies could collaborate to help halt the spread of AIDS. Automakers could build vehicles that consume less gas. Banks could pour more profits into community development. For progressive CEOs, there is no shortage of good causes.

But under Canadian law, chief executive officers are required to put their companies’ interests first. The apparent conflict between doing what’s socially responsible and what’s most profitable can lead well-intentioned executives to make bad decisions, says Roger Martin, dean of U of T’s Joseph L. Rotman School of Management.

Finding new and innovative ways for companies to be more socially responsible without having to sacrifice profits is the focus of Rotman’s AIC Institute for Corporate Citizenship. The institute was created early in 2004 with a $10-million gift from businessman Michael Lee-Chin, whose AIC Ltd. has become a major player in the Canadian mutual fund industry. In 2002, Lee-Chin purchased a 75 per cent share in Jamaica’s National Commercial Bank – with the aim of investing a portion of the profits to improve education and health care in that country. “He’s the perfect person to work with us on this,” says Martin, the institute’s first director. “We plan to become a global centre for thinking about good corporate citizenship and how to put that into action.”

Martin himself has thought a lot about corporate responsibility. In an article published in 2002 in Harvard Business Review, he devised a framework to help executives determine whether a virtuous action enhances or undermines shareholder value. The model challenges corporate leaders to develop strategies that enable them to undertake socially responsible actions while also generating greater profits.

Martin cites the cement industry – a major contributor to greenhouse gases – as a case in point. A cement company acting alone to reduce its emissions would incur higher production costs, have a negligible impact on total emissions and likely lose market share to its lower-cost competitors. Martin argues that, rather than waiting for governments to impose regulations, cement companies ought to act together as an industry to reduce emissions. In doing so, the companies would all earn societal goodwill without sacrificing much, if any, profit individually.

But companies can’t stop there. When socially responsible behaviour becomes the norm (or is mandated by law) the public stops recognizing such actions as “progressive.” For companies to continue to earn public credit, they must continue to lead and innovate on the “virtue frontier.” Martin says such action requires committed and visionary executives – and persuasive ones. “[The AIC institute] will encourage leaders to be more expansive in their thinking, rather than wait for governments and citizen groups to get on them.”

The institute supports research in business ethics and is developing case studies to enhance existing ethics courses. It will also help develop new programs, including an MBA major in corporate citizenship.”It’s becoming obvious that customers, employees, governments are all saying, we expect corporations to do more to be good citizens,” says Martin. “Yet the message of what executives should do is exceedingly vague and confusing. At the centre, we’re building a model to help them.”