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The Conscience of Business

No MBA student would confuse a women’s hospital, a municipal vehicle fleet, and a sustainability nonprofit for having much in common—not in mission, not in deeds, and not in challenges. After all, how do hydraulic lifts and socket wrenches relate to anesthesia and O.R. scrubs?

Sharp distinctions aside, these organizations share a universal truth: they each serve stakeholders who, however different, demand that their organizations act in an ethical, principled manner; in other words, that they practice corporate social responsibility (CSR). In the spring term, five Katz MBA students were selected as fellows to complete CSR consulting projects for Magee-Womens Hospital of UPMC, Allegheny County, and Sustainable Pittsburgh. The students reviewed the CSR initiatives of the organizations, an undertaking in which they straddled the murky line between the abstract and quantifiable.

Putting in long hours that made the fellowships feel more like an internship than a class, the students developed sustainability frameworks, interviewed stakeholders, bench-marked similar organizations, and pored over reams of data. The work required identifying strategic priorities and measuring how well clients lived up to goals; it meant thinking big picture and providing the numbers to back it. After months on the job, the students presented boardroom recommendations to their clients.

“It’s been an outstanding opportunity for two graduate students to impact the environment of a corporation that calls Pittsburgh home. It’s not a term paper; it’s real,” says Katie McLay, who along with Brian Burley, worked on the project for Magee hospital. McLay is a dual-degree student also pursuing a law degree and intends to work in energy litigation upon graduation.

The sustainability projects were funded by BNY Mellon and administered by the David Berg Center for Ethics and Leadership, under the tutelage of Audrey J. Murrell, director of the center and an associate professor of business administration, psychology, and public and international affairs. This spring was the second year that student fellows undertook the projects, and the Magee and Allegheny County projects were a continuation of the jobs done by students the previous year. The students, who are known as BNY Mellon CSR Fellows, were selected following a competitive application process and received a stipend for their rigorous assignments.

“This is only the beginning,” Murrell says. “Companies are paying stricter attention to issues like sustainability because these efforts have a clear and positive impact on a company’s reputation and effectiveness. At a time when many companies expect employees to be involved in CSR-related activities, especially for employees approaching management levels in a firm, our students are at the forefront of these efforts.”

BNY Mellon provided $1 million to Pitt Business in 2011 to support CSR initiatives. In addition to student fellowships, BNY Mellon’s funding supports the research of faculty fellows on three research projects with a CSR perspective. The funds also support additional faculty research and have been used by the Berg Center to host the Great Case® Business Ethics Competition. The annual case competition, a spin on the TV show The Amazing Race, is open to graduate students in law, public policy, and business.

In the Driver’s Seat

BNY Mellon, Murrell says, publishes the gold standard in CSR reporting. Even still, the company’s CSR standards continue to adapt, with a focus today on core business issues such as operational reliability, ethics, responsible investments, and supply chain responsibility. “We think of it as a journey. You’re always evolving and reacting to what stakeholders expect across the marketplace and with the company. It’s not static. You must evolve over time,” says Anna Kearney, BNY Mellon’s vice president of corporate social responsibility.

Kearney personally meets with the Katz student -fellows as they begin their projects. “It’s incredibly valuable to -listen to what the next generation of business leaders care about and want to see in future employers,” Kearney says.

Murrell says that CSR reporting, when done well, improves operational efficiency. It integrates a company’s social, environmental, and economic concerns into its -culture, strategy, and operations in a transparent manner. In effect, CSR efforts are a materiality analysis—a close look at issues that, one, matter most to stakeholders and, two, -significantly impact an organization’s business operations.

In the project with Allegheny County, students Luciana Arbach and Sanjay Singh, both of whom will graduate in April, assisted county Sustainability Manager Jeaneen A. Zappa (MBA’97) and Acting Fleet Manager Gene Pieszak. The county’s vehicle fleet is 700-strong, an eclectic mix of police squad cars, dump trucks, and asphalt pavers, not to mention another 500 pieces of motorized equipment. For Zappa, fleet sustainability isn’t a vague objective—an executive order has set the goal of increasing the county’s conversion to technologies with higher efficiency and lower emissions by 5 percent annually.

“The value of the MBA program is the ability to look at things in a broader perspective and to set the metrics to get there,” Zappa says. “It is important for us to be data-driven, and that goes well with what b-schools cultivate.”

Diving deeper into the student fellows’ work from last year, Arbach and Singh targeted three areas: fleet operations management, fuel consumption, and emissions standards. The project’s primary purpose was to help the county fleet optimize resources and increase transparency. The students benchmarked Allegheny County against counties in the metropolitan areas of New York, Phoenix, Portland, Seattle, San Mateo, Calif., and Washington, D.C. “Efficiency and emissions are interrelated. If you are conscious of fuel consumption, then you are also conscious of emissions,” says Singh, who is pursuing a position in corporate strategy.

Arbach and Singh analyzed the county fleet’s management during the past three years. They compared it to how other public entities budget for fleets, monitor fuel efficiency, allocate funding, manage vehicle replacement schedules, and incentivize sustainability targets. Ultimately, the students developed dashboard metrics of what is most important to Allegheny County’s fleet management.

“We looked at ways and methods to reduce the carbon footprint, which in turn will reduce costs,” says Arbach, who when she graduates will join GE’s Human Resources Leadership Program.

In a separate project, student Vinay Deshpande assisted his client, Sustainable Pittsburgh, in a review of the certification platform that the nonprofit offers for Western Pennsylvania businesses, called the Southwestern Pennsylvania Sustainable Business Compact. Deshpande reviewed the current version of the compact’s “Sustainability Essentials” and suggested which elements should be updated, revised, or removed in the next version. Additionally, to measure corporate sector progress regionally, Deshpande designed a process for strengthening tracking and reporting.

“Right now, CSR is not mandated, but it is something that companies are gradually warming up to. My project is laying the groundwork so that if a client approaches Sustainable Pittsburgh and asks for help with CSR, they could help tailor a system to that client. Also, the project is a way for Sustainable Pittsburgh to stay up to date with the latest industry standards,” Deshpande says. When Deshpande graduates, he is joining Crane Co. in Los Angeles as an internal consultant in the management and manufacturing process.

Prognosis is Positive

In their project with Magee hospital, students McLay and Burley encountered a problem endemic to organizations new to CSR programs: they rate well in execution, but poor in reporting results. So McLay and Burley, in continuing the work of last year’s fellows, determined four priorities for Magee to report: community health, health education, operational reliability, and operational effectiveness.

“Magee does a lot of good not only within its hospital walls but all throughout the region. But too often that good goes unnoticed,” Burley says. “Our report establishes a concrete framework for CSR reporting so that Magee has the information and process needed to tell its story to its shareholders and the community at large,” Burley says. Active in a variety of community roles, including 100 Black Men of America and Kappa Alpha Psi Fraternity, Inc., Burley will pursue a position in corporate diversity when he graduates from the One-year MBA program in July.

Registered Nurse Judith Focareta, the coordinator of Magee’s environmental health initiatives, says that CSR complements the basic humanitarian purpose of hospitals. “Hospitals exist to serve the public. We are here to offer information about public health, preventive health, so that people don’t have to be in the hospital and so we can help prevent re-admissions,” Focareta says.

Magee tracks significant data for grants and awards. “They were excited when we said, ‘Just give us the numbers.’ We asked them to give us everything so that we could interpret it,” McLay says. The students analyzed Magee against key benchmarks: the Cleveland Clinic, University of Maryland Medical Center, Fletcher Allen Hospital of Vermont, and the University of California San Francisco Medical Center. Focareta says the students’ work could potentially be extended as a template for the entire UPMC hospital system.

But is CSR fundamentally at odds with the business bottom-line mentality? And if CSR works for some organizations, will it work for all of them? Assistant Professor of Business Administration Andrew Koch is researching the tension between socially responsible choices and shareholder wealth. He was awarded a BNY Mellon CSR Faculty Fellowship, to fund his work. Additional faculty fellows receiving support are Chris F. Kemerer, the David M. Roderick Professor of Information Systems, whom with PhD student Brian Kimball Dunn is studying consumer welfare in digital two-sided markets, and Assistant Professor of Accounting Kwang J. Lee and Professor of Accounting Nandu J. Nagarajan, who are studying board independence in the context of political ties.

Koch says his finance research addresses unanswered questions. “When we see companies take socially responsible actions, is that in the interest of shareholders or of CEO’s themselves? The CEO is spending other people’s money. If he is spending it on a technology to reduce pollution, is that good financially to the shareholders? Or is it to his benefit, for example, his image?”

Koch’s work demonstrates a positive relationship between firm value and CSR. “The problem,” he says, “is that causality might go either way. The firm could have a high valuation because it is socially responsible or the CEO might have more leeway to focus on pet projects because the firm has high valuation.” To break it down, Koch organized conditional empirical tests. “One way that CSR might drive high value is if consumers are willing to pay more for goods produced by socially responsible firms. In this case, the effect of CSR on firm value should be strong among firms that sell directly to consumers and weak among firms that sell to other firms. If causality is reversed, then the relationship should not depend on whether the firm sells to businesses or end consumers,” he says.

Koch finds that, among business-to-consumer industries, socially responsible firms have a return on assets five percentage points higher than irresponsible firms. The difference is insignificant among business-to-business industries. “We want there to be an alignment between the two. From the finance perspective, it’s best if the CEO is acting in the interests of the shareholders,” Koch says.

Whether through faculty research or student fellowships, CSR issues are a fertile area of study, according to Murrell, because they are by definition multidisciplinary. “Leadership and ethics must be practiced in tandem. For leadership without ethics is hollow and ethics without leadership lacks impact,” Murrell says.

So the next time someone asks the riddle of what does a hospital, vehicle fleet, and nonprofit have in common, the answer should be clear: why CSR, of course.