David Vogel holds the Solomon P. Lee Chair as professor at the Haas School of Business at the University of California, Berkeley. He is the author most recently of The Market For Virtue: The Potential and Limits of Corporate Social Responsibility, which analyzes the forces driving corporate social responsibility initiatives and their impact on business behavior. Among Vogel's other books are Dynamics of Regulatory Change: How Globalization Affects National Regulatory Policies (co-edited with Robert Kagan) and Fluctuating Fortunes: The Political Power of Business in America. He is also editor of California Management Review.

Multinational Monitor: Does investing in corporate social responsibility pay, from a shareholder point of view?

David Vogel: Sometimes it does, sometimes it doesn't; it varies enormously.

There are cases of companies that have gained a competitive advantage from being responsible. But there are also many cases of companies with good records of corporate responsibility that have done very poorly financially. At the same time, there are many companies who have pretty irresponsible records of corporate responsibility that have done very well.

Corporate responsibility is like any business strategy. It makes sense for some companies some of the time. But I think for most companies, most of the time, the financial benefits of being responsible or the financial costs or risks of being irresponsible are overshadowed by other normal business competitive pressures - so that on balance, corporate responsibility most of the time actually makes relatively little difference to financial performance.

The Market For Virtue goes through a fairly extensive literature on this issue.

The share price performance of socially responsible funds is no better or worse than any other investment strategy - some years they do better than the market, some years they do worse than it. Studies that try to demonstrate a positive relationship between corporate responsibility and profitability are flawed in part because it is very difficult to measure corporate responsibility. In addition, even if there was a positive relationship, it could be due to the fact that more profitable firms have more resources to behave more responsibly.

Again, there are lots of examples, which I cite in the book, of very responsible firms which have had lots of difficulties. One thinks of Ben and Jerry's, Marks and Spencer, Levi Strauss, Hewlett-Packard under Carly Fiorina, or Chiquita Banana. One can also cite cases of firms that most people would regard as being irresponsible in many dimensions, firms like Philip Morris or ExxonMobil, which have done extremely well financially over the long-term.

MM: What about the idea that it pays in the long term to invest in social responsibility?

Vogel: I think that is highly unlikely. There are certainly investment opportunities in social responsibility, but if you look at the full range of viable investment opportunities, their relative role and importance remains modest. Socially responsible investments will remain overwhelmingly overshadowed by business opportunities, which have nothing to do with social responsibility. Rather they have to do with marketing research and development, global competition, etc.

MM: Is the inverse true - does it pay to be irresponsible?

Vogel: I don't think the inverse is true either. I don't think that more responsible companies necessarily do less well. In fact, the relationship between corporate responsibility and financial performance is neither positive or negative; in reality there is little relationship between the two.

The good news is that the market does not penalize corporate responsibility. The bad news is that it also doesn't reward it.

The bad news is that the market does not penalize corporate irresponsibility, and the good news is also that it doesn't necessarily reward it.

MM: The amounts invested in socially responsible investment (SRI) funds are growing. How significant are these investments?

Vogel: In the U.S., about 2 percent of mutual investment is in socially responsible funds. In many European countries, it is roughly comparable, possibly slightly less.

That's just based on mutual funds. Once you get beyond that, it is hard to know. You could have other fiduciaries - pension funds, institutional investors - who could include some socially responsible criteria in their investment decisions, but it's difficult to know how seriously they take social responsibility performance into account in selecting their portfolios. But the universe is probably somewhat larger than 2 percent in terms of investors who might consider some dimensions of social responsibility.

In practice, whatever the amount of socially engaged investors, they're overshadowed overwhelmingly by global capital markets, virtually all of whose investors are indifferent [to socially responsible criteria]. They are indifferent largely because they don't think it is material to corporate financial performance, and in large measure they are correct.

People make the claim that companies that are more responsive with respect to global climate change are better investments, but I think the evidence that that is the case is unclear. Certainly it has not been true to date. Could it be true at some point five or 10 years in the future? It's obviously possible. But it's also likely that if you put all your money in gambling stocks, you will also do very well.

MM: Do the funds that are invested in SRI have any impact on company performance?

Vogel: I think that the growth of SRI has had no impact on share prices.

I think a lot of the pressure from investors on firms takes place through political mechanisms - such as meetings with managers, the filing and voting for shareholder resolutions, etc. Companies often respond to these political forms of pressure from institutional investors. But their impact is not reflected in share prices.

MM: So is an implicit claim in The Market For Virtue that lots of people are really tricking themselves in thinking that they are promoting change by investing in SRI, and maybe even are being fooled by people in the SRI industry about what's going on?

Vogel: I think they may be fooled to the extent that they feel that investing in SRI is going to affect corporate behavior. To the extent that they believe so, they are mistaken.

On the other hand, it seems to me if you care about particular values and wish to express them through your investment decisions, then SRI funds provide a very useful service to people. They reflect an important virtue of capitalism, which is that it provides multiple opportunities for people to reflect their preferences through markets. Some investors want to reconcile their social or political preferences with their investment decisions, in particular by not benefiting from investing in companies that offend their value, and SRI provides a vehicle to enable them to do so. From this perspective they are not fooled.

MM: You talk in the book about other corporate campaign tactics. Do those have an impact on company performance?

Vogel: The evidence of their impact on sales is very, very modest.

Nonetheless, they have an impact because many companies are very concerned about their reputation, they're very risk averse and they have a lot invested in their brands. They're willing to respond to those pressures out of a fear that their reputation and brands will be adversely affected. In that sense, I think they have a fairly substantial impact - but it's more of a reputation-political impact rather than a dollars-and-cents impact.

MM: How do you reconcile those two things? Presumably they care about their reputation because of the ultimate bottom line impact.

Vogel: It's hard to say. There's always a counterfactual: if a company was unresponsive, its sales might go down to some extent. I think a lot of corporate investment in corporate social responsibility is a form of insurance against the possibility of acquiring a bad reputation. Most firms don't primarily want to be seen as "responsible;" rather they don't want to be regarded as "irresponsible."

If you manage a brand, you're sensitive to any possibility of differentiating your brand positively or negatively. If you manage a brand in which an enormous amount is invested and which enables you to command a substantial price premium, it makes business sense for you to invest enough in corporate social responsibility to prevent your brand from being targeted.

What constrains the amount of resources a company can be expected to invest in protecting its brand is the fact that companies rarely can command a price premium for more responsibly produced products. So, if you can protect your brand with modest expenditures, doing so makes business sense. It is a prudent thing to do - and many companies have done so.

MM: What about the labeling approach? What kind of impact does that have on company products?

Vogel: It seems to be pretty modest; though it does vary by country.

It is much stronger in Britain than in the United States. In the U.S., there are a few ethical labels: fair-trade has a modest and rising market share; it's not overwhelming, but it does exist. Rugmark, which is a child-free rug label, has a larger market share in Europe though there has been some modest interest in the U.S. Certification by the Forest Stewardship Council is important to many retailers, but there is little consumer interest or awareness.

I think ethical or social labels appeal to niche markets; that is to say, for particular specialty companies they make business sense, but their relative importance remains modest. For virtually all consumers virtually all of the time, purchasing decisions are based on price, performance and convenience. Social considerations rarely play an important role, except in rare instances.

The market for ethical branding is a niche market - it is never going to be a mass market.

MM: You write that the market for virtue does not clear, what does that mean?

Vogel: It means that demand for virtue is not sufficient to encourage firms to substantially increase its supply.

MM: But isn't the demand sometimes there, but not met? For example, the wage component of athletic shoes or clothing is really quite tiny. Couldn't Nike, for example, raise wages in a way that would matter considerably to workers in Indonesia or China without having much impact on their overall impact costs?

Vogel: Yes, it can, and it has. Actually, Nike has substantially raised wages in Indonesia and they've spent a lot of money on monitoring and they've forced their suppliers to improve working conditions. Nike can afford this because Nike is a highly profitable company with a premium brand. People are willing to pay a lot because of the Nike name, so these expenditures make business sense for Nike.

On the other hand, Nike competes with other brands, and people do care about costs at some level. Nike cannot have its products costs measurably more than their competitors. I think if they did, they might well suffer.

MM: You point out that large companies in general believe they can't sell social responsibility, the evidence being that they don't try.

Vogel: Relatively few try. There seems to be some increase in companies trying, but I think relatively few have been successful.

MM: Is it possible that there are some significant untapped areas for doing this? If you look at airbags, for example, the auto companies fought them for years, and then turned around and started marketing them. Couldn't the auto companies more aggressively market fuel efficiency, for example?

Vogel: That is an interesting example. The reason airbags are in every car sold in the U.S. is because the government requires it. It's interesting that we did not depend on the market to give us airbags; rather we relied on government regulation. I think that makes complete sense. Airbags were quite expensive. Some consumers were willing to pay a premium for them, but of course most consumers were not, which is why the government was forced to require them.

In the case of more fuel-efficient products, there is a blended benefit. To the extent that consumers directly benefit from a more responsible product, then the market appeal is quite different. It's like organic food - there is a big market for organic food, not because people are virtuous, but because they feel that organic food makes them better off and they are willing to pay a price premium for it. If consumers directly benefit from a product, they're willing to pay more for it. But I don't think this has anything to do with corporate responsibility.

On the other hand, for something like responsibly produced athletic footwear, it's the same product - the benefit is entirely altruistic. It is difficult to get many consumers to behave altruistically for many products. There are always particular products that have a sort of cache to them. But for upwards of almost everything we buy all day long, it's difficult to get us to vote our political preferences in the marketplace.

MM: What is the relationship between voluntary corporate social responsibility - programs that are either undertaken truly voluntarily or in response to pressure - and government regulation?

Vogel: In a lot of cases, corporate responsibility takes place in a different world, because a lot of the issues focus on developing countries and corporate policies that affect developing countries. There is no prospect of effective regulation in this realm, so basically these are responses to public pressures. There are some cases where companies have engaged in corporate responsibility in order to avoid government regulation, but that is only true in Europe and the U.S. rather than in developing countries.

MM: To what extent have voluntarily adopted initiatives paved the way for subsequent government regulation?

Vogel: I don't see so much evidence of that. I guess you could argue that voluntary corporate efforts on climate carbon reduction in the European Union probably helped facilitate European ratification of the Kyoto Protocol, so that would be one example of a direct impact. You could also take as an example the U.S. restrictions on trade and investment in Myanmar and Sudan, which began as private corporate campaigns of corporate responsibility, but have now been enacted into law.

Some developing countries have responded to corporate initiatives [especially on labor standards] by trying to strengthen their own standards and policies. That's been true in Cambodia; it's been true in Indonesia; it might be true in Vietnam.

So there are some isolated cases of governments that have responded to private corporate initiatives by increasing regulation, but not many.

MM: Is rising interest in corporate social responsibility and some of its limitations connected to the phenomenon of economic globalization?

Vogel: I think it is a direct response to a perception that globalization has inappropriately distributed benefits globally; and that companies benefiting from globalization are the main vehicles of it, and therefore they should be the main targets to ameliorate some of its negative impacts.

MM: At the same time, to the extent that globalization is associated with expanded capital mobility and greater options for suppliers and in some contexts heightened levels of competition, it also poses greater challenges to corporate social responsibility.

Vogel: I think that's right. Globalization is in a sense a mixed benefit for firms. On one hand, it gives them greater options, in many cases lowering costs. But on the other hand, it creates a sense of vulnerability because they develop global brands and therefore they're vulnerable to global pressure.

If you think about it, Nike in a sense imports sneakers and through activist pressure it exports higher labor standards. It's the same mechanism of back and forth - if Nike was not in Vietnam, the impact of Western pressures on working conditions in Vietnam would be nil. So globalization and global brands create a vehicle for Western pressure groups to affect global production.

MM: How do company executives perceive all of the talk and pressure around corporate responsibility? Is it a serious concern for them?

Vogel: They are concerned about it. I don't think there is any question that's true. That's why substantial numbers of global firms issue some sort of responsibility reports; they have social responsibility offices; they negotiate with NGOs [nongovernmental organizations] - they follow these issues very closely. They are concerned about brand identity, they're concerned about keeping out of the spotlight, figuring out ways of cooperating with NGOs.

Probably the most consequential dimension of corporate responsibility in the last decade is the extent to which companies are really willing to sit down with NGOs and try to figure out ways of behaving more responsibly. At the same time, virtually all major global industries now subscribe to codes of conduct, and in some cases, they also include third-party monitoring. So in this sense, global business firms based in the U.S. and Europe have embraced the principles of corporate social responsibility, though the extent to which their actual social or environmental performance has improved or changed remains highly uneven. The actual impact of corporate responsibility on corporate performance remains very mixed, though on balance, there has been measurable improvement in some areas, most notably with respect to working conditions in their subcontractors.

MM: How important is specific corporate culture and also the random personality and interests of the CEO?

Vogel: It can make an enormous difference. Much of the variance in corporate responsibility reflects CEO preferences, CEO values.

MM: What is the role of employees?

Vogel: A lot of companies view corporate social responsibility as a way of attracting, maintaining and motivating employees. They certainly don't want people not to work for them because they have a bad reputation, and they worry about that. If you look at a lot of firms, say Nike, which have been subject to lots of public pressures, an important reason why they have responded to them is due to employees who want the company to be seen as responsible. In addition, companies which have corporate cultures such as Hewlett-Packard or Starbucks, which emphasize corporate responsibility, are much more likely to be responsive to external pressures.

I just was reading an article in the Financial Times about the mining and mineral industry, which has no consumer brand. They're concerned that some relatively environmentally aware, smart MBAs are shunning the mineral and mining industry because it has such a horrible environmental record, and so they too want to be seen as responsible. If someone is choosing between British Petroleum and Freeport McMoRan, they are worried that they will write off Freeport because of its bad environmental practices in Indonesia.

MM: One of your concluding recommendations in The Market for Virtue is that companies that consider themselves responsible should push more for government regulation.

Vogel: Yes, I think that is very important. The social responsibility movement has by and large been apolitical: it has overlooked the importance of public policy. Much of the attraction of corporate responsibility to business students and managers is precisely that it appears to provide a vehicle for them to make the world a better place without government regulation. In some ways, social responsibility is a philosophy that reflects social liberalism but economic conservatism. I think that is why it is so popular among managers.

If you're going to look at companies and place them under pressure, we should focus as much on their public policy positions as on their private practices. In that sense, a firm like Starbucks, for example, whose CEO has been running around campaigning for government healthcare coverage because he provides that for his employees is, I think, acting very responsibly.

I wish the companies that reduce their carbon emissions voluntarily would also support mandatory carbon reductions.

MM: Why don't they do that more often?

Vogel: They don't like government regulation; it's coercive. It's just an instinctual sense. To ask companies to support regulation in the American political culture is asking a lot. By and large, they view that as their last option; they really would prefer to keep it voluntary.

MM: Even though the company that is investing in social responsibility is paying for it?

Vogel: In most cases, their costs are not substantially higher. I think Starbucks is actually an exception because they have such large healthcare costs - they evidently now pay more for healthcare than for coffee.

But I think for most companies, the costs of social responsibility are not sufficiently large so that it really pays for them to force all their competitors to adopt those policies.

And of course, if they gain a competitive advantage from being responsible, then they don't necessarily want their competitors to adopt these policies.