The myth of the ethical consumer

Consumers don’t always make the ‘right’ ethical choice. AFP / Lionel Healing

It seems every company now considers corporate social responsibility a vital part of their proposition for customers. But even with scandals involving multinationals like Enron, Tyco and Siemens, we could be looking in the wrong place for accountability.

In today’s modern societies corporations are sub-societies made up of complex interacting individuals – managers, investors, employees, customers – who possess specific citizenship rights.

While politicians, reporters, activists and academics pump out articles, reports, propaganda and papers demanding more corporate accountability and social responsibility, I wonder if that focus is on the wrong target.

Surely, if the myriad people who make up the firm and have influence on the firm’s decisions themselves are more “socially responsible” would not the firm also be?

Corporations do not make decisions. They simply set the environment in which individuals make choices. Even that environment is itself a product of decisions made by individuals in the past.

Hence, to expect corporations to change in a manner that enhances their “social responsibility” requires that multiple components of a system must be realigned.

For example, managers must make decisions that influence employees. They, in turn, must make decisions that influence customers who must make decisions and investors who must make decisions.

Not all of these decisions are what economists call “Pareto optimal”. In other words, a corporation’s corporate social responsibility policy may not be a “win-win” for all involved.

Consumers may have to pay higher prices, employees may face workplace restrictions, managers might lose control over aspects of their decision making power or have to spend more time mollifying politicians, investors may face dividend restrictions, and so on.

Indeed, if CSR was simply a win-win (what is sometimes coined “doing well by doing good”), it is a corporate no brainer.

Only the truly stupid would not make changes that enhance the value of all components of the corporate system (what I call “doing well by not being stupid”).

Given that the really hard decision is how to enhance a corporation’s CSR when someone has to pay a price, the question becomes “which of the human components of the corporation are willing to bear that cost?”

Over the last 10 years, a group of colleagues and I have been slowly working through this last question.

To date we have evidence bearing on three groups: consumers, investors and employees.

While society may be demanding more social responsibility from corporations, individuals appear unwilling to pay much of price to bear that responsibility directly as consumers, investors or employees.

From the consumer perspective we have a simple equation: if consumers value the social aspects of the products/services they purchase this creates a window in which CSR can be viewed as demand-driven.

In other words, consumers, voting with their dollars, give corporations an incentive to provide more socially responsible products.

Unfortunately, there is limited evidence that this is the case for other than niche products and small groups of activist consumers.

A series of studies outlined in The Myth of the Ethical Consumer provides overwhelming evidence that while consumers profess a social consciousness in surveys (where there is no cost) they fail to live up to this when their behaviour is examined directly or via structured experimentation.

In one experiment, we showed that when the ethics competed with functionality – i.e., the “ethical” product always required the individual to sacrifice some aspect of product functionality – ethics lost in nearly all cases.

In another study, we showed that we could manipulate an individual’s preference for “fair trade” products simply by prompting them and removing their privacy.

With such actions 70% purchased the fair trade alternative (which was the same price). Without such actions less than 1% purchased the fair trade product.

What this showed was it was the context that mattered not the “ethicality”.

In a recently completed study, we had over 700 Australians of all ages engage in an experiment where they could reallocate their pension funds in a manner that allowed them to invest in socially responsible alternatives across the entire spectrum of risk and return.

This allowed us to abstract an individual’s choice of investment based on risk-return from their propensity to want to invest in companies with good CSR track records.

Our naïve hypothesis was that people would ignore the CSR track records and invest based upon risk and return. What we found was astounding.

On average, people allocated 20 percentage points less of their super funds to the socially responsible alternatives!

In other words, when faced with two alternatives with EXACTLY the same risk-return characteristics, people under-allocate to the social alternative and do so to a dramatic extent.

At one level this seems ridiculous, as people appear to be leaving money on the table.

However, what is going on is that investors apparently believe that the firms will be “held up” in the future and hence may sacrifice investor interests to maintain their CSR position.

Finally, in a sequence of studies we have been examining whether or not potential employees will account for a firm’s social positioning when looking for employment.

It is generally argued in the popular press that CSR is valuable in the “war for talent”.

In one of these studies we examined whether or not MBA students at major schools would sacrifice salary to work for more reputable companies – those with “certified” CSR positioning and workplace awards.

Again, like the consumer studies we found a small group who took such reputation into account, but the norm was that potential employees were fundamentally utilitarian in their job choices. They either focused on career issues or financial returns. If the reputational factors aligned with this, that was good. If they did not align with this, the potential employee ignored them.

Overall, we found that social reputation was worth only about 2-3 percent of the value of the job contract and workplace reputation little more than 3-4 percent.

What we did find was that “bad” reputations hurt – treating employees like slaves is not particularly smart – but “very good” reputations did not help when seeking managerial employees.

All this work provides a rather chilling characterisation of the potential of corporate social responsibility. However, it can be read in another way.

What our work reveals is that individuals are nuanced in their assessment of the factors underlying their choices.

One cannot simply accept that they will respond positively to “doing good”; it must be good for them in their role as consumer, investor, employee and so on.

In addition, it is silly to speak of corporate social responsibility without understanding that for corporations to be socially responsible we all have to be socially responsible as individuals in our various roles.

We are all consumers. We are all investors. We are all employees. Hence, we cannot expect corporate social responsibility without managers, employees, investors and consumers playing their part.

Further reading: Professor Tim Devinney will be speaking about the myth of the ethical consumer on Wednesday 27th April in Sydney.