“Pleas for corporate social responsibility will be truly embraced only by those executives who are smart enough to see that doing the right thing is a byproduct of their pursuit of profit.” – Arneel Karnani, University of Michigan associate professor of strategy, Wall Street Journal, August 23, 2010.

“Whether one likes or dislikes Starbucks or its philanthropy, the Starbucks CSR model looks like a recipe that many corporations recognize as a solid formula for social responsibility,” – Rick Cohen, The Non-Profit Quarterly, April 20,2011

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Celebrating its 40th year in business, Starbucks Corp (NASDAQ: SBUX) is a profitable $11.7 billion roaster/retailer of specialty coffees with operations in 50 countries around the world. Last year, the world’s leader in the sale of upscale coffee (e.g. mochas, lattes, cappuccinos and whole/ground beans) reported a net profit of $1.24 billion and recorded $33 billion in market capitalization.

Throughout its history, the company has made a commitment to fiduciary responsibility, generating profits and returns to its shareholders, while embracing a company culture that includes a focus on corporate social responsibility (CSR). Early forays into this latter field included support for the anti-poverty organization, CARE, and for the environmental non-government organization (NGO), The Environmental Defense Fund.

Starbucks’ first CSR efforts began in 1994 as an activity incorporated in its Environmental Affairs Department with a modest budget of $50,000. Five years later, a separate-and-distinct Environmental Affairs Department was established, focusing on five areas: business practices, environmental, community affairs, corporate giving and the Starbucks Foundation. By 2002, the 14-member department was working with a budget of $6 million.

Starbucks chief executive officer and president Orin Smith drew a linkage between shareholders and stakeholders, which include customers, suppliers, partners and coffee growers. “It’s (CSR) an integral part of the new business strategy,” said Smith.

Worldwide concern about the plight of the Amazon rain forests and sensitive species has put a public magnifying glass on the production of coffee in the tropics, including the mild arabica beans used by Starbucks to serve its global customer base. The majority of the coffee crop (the world’s second largest commodity) is grown on small-and-medium sized farms, many in areas of significant environmental impact containing a wide variety of fragile species. The plight of these regions has been the mission of environmental NGOs, including Conservation International.

At the same time, the public esteem and trust for these NGOs has steadily increased. For example, the 2011 Edelman Trust Barometer revealed that not-only are NGOs (seen as responsible third-parties) the most trusted in society, but their level of popular support is growing from  57 percent in 2010 to 61 percent in 2011.

Starbucks collaborated with one of these more trusted NGOs, entering into a strategic alliance with the professionally oriented Environmental Defense Fund (EDF), to develop a more environmentally friendly coffee cup. The question facing the company was how could it enhance its reputation as an environmentally conscious corporate citizen without compromising the quality of its supply of mild arabica beans?

Could the company grow revenues and profitability and promote shareholder value (fiduciary responsibility), while being seen as a good steward for the environment and to improve the standard-of-living for its suppliers, the medium-and-small farmers (corporate social responsibility)? Enter biodiversity NGO, Conservation International (CI).

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The first uneasy meeting between Starbucks and Conservation International representatives took place in 1997. Starbucks expressed its concern about the quality of the coffee that it was buying for its discerning customer base. Conservation International was focused on the impact of hundreds of medium-and-small coffee farms in the hills of the environmentally sensitive region of Chiapas, Mexico. Concurrent with this meeting were the letters and cards coming from the customer base asking Starbucks whether it is actually buying shade-grown coffee and about protecting the forests where coffee is grown.

Conservation International saw that Starbucks could exert considerable influence as a major purchaser on the company’s supply chain (includes the coffee farmers) to protect the environment. So why did the strategic alliance between a major, publicly traded, for-profit corporation, Starbucks, and an influential, non-profit, environmental NGO, Conservation International, work for the benefit of not only both parties, but the overall environment as well?

Due diligence was definitely one factor. Accumulated trust eventually became a second factor. Both entities took the time-and-effort to comprehend and appreciate the position of the respective parties. Starbucks as a publicly traded company has a fiduciary responsibility to grow the top-and-bottom lines and to generate superior value for its shareholders. The top line increased from $1.68 billion in 1999 to $2.64 billion just two years later. Gross profit margin expanded slightly in the course of these three years even though COGS expenses grew by $742 million. Total net income increased from $101 million in 1999 (6.1 percent) to $181.2 million (6.8 percent). These revenue and profitability enhancements were recorded after Starbucks signed a memorandum of understanding (MOU) with Conservation International (not implying a direct effect of the strategic alliance on company financials).

Starbucks impressed upon Conservation International that it was not going to serve its customer base by purchasing politically correct, shade-grown coffee beans that are substandard from a quality standpoint. Conservation International responded by teaming with Starbucks, finding common ground, even playing a direct role on coffee farmer quality control. Was Conservation International in effect helping Starbucks maintain its fiduciary responsibility, while exerting pressure on the corporation for CSR?

Starbucks CEO Smith even extolled the “synergies” between Starbucks and Conservation International with the former focusing on quality coffee and the latter on the environment. Typically, the word “synergy” is reserved for evaluation of mergers and acquisitions. Smith was a member of the Conservation International Board of Directors as of October 31, 2001.

Eventually, the Chiapas project led to signed agreements between Conservation International and certain Mexican coffee producers and their respective cooperatives. Upon meeting Starbucks quality standards, producers could sell an increasing percentage of their crop to Starbucks for premium prices (Especially important considering the drop in prices for mild-arabica and rustica coffee prices worldwide). Starbucks eventually became comfortable guaranteeing low-interest loans to these small farmers, providing them with needed capital.

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In exchange, these farmers agreed to not harvest trees on producer farms or the Chiapas Biosphere Reserve, a wide variety of shade trees would be planted, and no coffee pulp could be thrown into local rivers.

Starbucks’ “synergistic” and cooperative strategic alliance with Conservation International followed the company’s professional and managerial relationship with the Environmental Defense Fund. Does that mean that Starbucks enjoys the same relationship with all environmental NGOs? Unfortunately, the answer is “no.”

While the relationship with EDF was professional and the interchange with Conservation International was synergistic, Starbucks’ was subjected to a wave of confrontational tactics undertaken by other environmental NGOs. For example, Global Exchange launched a protest at the company’s annual meeting and demanded that Starbucks sell fair trade coffee.

After a series of discussions, Starbucks entered into an agreement with TransFair USA, which provides certification for all Fair Trade Coffee in the United States. Starbucks offered a similar approach, comparable to its relationship with Conservation International to TransFair. The aim was to improve coffee quality, provide financial assistance to farmers and raise public awareness of biodiversity issues in the tropics. TransFair rejected Starbucks’ advance, stating that is only sells certification seals and would only deal with Starbucks in that fashion.

Ultimately, Starbucks did sign an agreement with TransFair to purchase Fair Trade-certified coffee, providing that it met the company’s quality standards that were needed to respond to consumer demand. Starbucks even paid 10-cents per pound licensing fee to TransFair. Even with this agreement Global Exchange and TransFair were badgering Starbucks to buy even more Fair Trade-certified coffee.

Contrary to the actions of Conservation International, TransFair had no interest on improving quality among its registered farmers. TransFair said this was simply not its mission.

Starbucks chief executive officer Smith acknowledged, NGOs are critical influencers. And there are some (e.g. EDF, Conservation International) that are willing-and-able to work with a multi-national company for their mutual advantage. Alas, there are others (e.g.TransFair) that are at best cordial, if not antagonistic and downright confrontational with multinational enterprises (e.g. Global Exchange, Seattle Audubon).

For Starbucks and other publicly traded companies, there will always be fiduciary responsibility (buy low, sell high). And to an increasing extent, there is also corporate social responsibility, including exerting pressure through the management of the supply chain to demand greater adherence to environmental stewardship. There is also the question of building brand equity.

A proactive, collaborative working relationship with a NGO, such as Conservation International, can directly benefit fiduciary responsibility and corporate social responsibility. They are not mutually exclusive terms of art.  These strategic alliances can also help inoculate or at least mitigate a MNE against outright hostility by certain NGOs that deliberately choose corporate antagonism as their modus operandi.

(Editor’s Note: The following analysis was made based on a May 1, 2004 Harvard Business School case presented by James E. Austin, Harvard professor, emeritus and Cate Reavis, senior researcher from the Global Research Group. To learn more about Austin’s impressive publication and research record, please visit http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=6413).

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