This document discusses corporate social responsibility (CSR) in the health sector, particularly as it relates to the pharmaceutical industry. It defines CSR and explores arguments for and against firms engaging in socially responsible behavior. While CSR can increase profits if consumers reward firms for it, information asymmetries and lack of transparency can undermine these incentives. The pharmaceutical industry contributes greatly to public health but suffers from a poor reputation due to issues like lack of drug innovation and pricing practices. Increased transparency through various means may help build trust and a virtuous cycle where "doing good" also leads to "doing well" financially.

1. Asymmetric Information, Communication, and
the Corporate Social Responsibility in the Health
Sector.
Juan-José Ganuza
Valencia, June 22th, 2010.

2. Corporate Social Responsibility
I A typical de…nition of Corporate Social Responsibility is
“The voluntary actions that business can take over
and above compliance with minimum legal requirements,
to address both its own competitive interests and
interests of the wider society." (UK’ Department of
s
Trade and Industry).
I A socially responsible …rm goes beyond what regulation
requires in the protection of the environment, of workers’
rights and welfare, product quality and safety, etc.
I A socially responsible …rm not only cares about the welfare of
shareholders, but also that of the other stakeholders of the
…rm: workers, consumers, community, environment, etc.
I CSR relates to Business Ethics (the values that constitute
the base of an organization’ culture).
s
But... what should be the values of a …rm?

3. “The proper business of business is business. No apology
required”. (The Economist)
“There is one and only social responsibility of
business – to use its resources and engage in activities
designed to increase its pro…ts so long as it stays within
the rules of the game, which is to say, engages in open
and free competition without deception and fraud”
(Friedman,1970)

4. CSR and Ethics
I Friedman defends the interest of the shareholders against the
managers that have their own preferences regarding CSR and
extract rents from shareholders.
I Savings Banks in Spain do not have shareholders and they
have to devoted a …xed proportion of their pro…ts to CSR.
I In an interesting experiment Caja Navarra asked its customers
in 2008 to which projects they wanted to devote these
pro…ts...
Bank’ choice
s Depositor’ choice
s
Leisure, Well-being, and Sports 35% 15%
Culture 28% 5%
Disabilities 11% 34%
Environment 5% 10%
Other 21% 36%

5. CSR, E¢ ciency and Philanthropy
I Friedman is also concerned with e¢ ciency.
I CSR may be limited to activities that are complementary with
the …rm core business. If this is not the case, philanthropy is a
better alternative than CSR.
I A …rm that maximizes pro…ts disregarding CSR may be owned
by shareholders who made very important philanthropic
contributions, Microsoft is typically used as an example...
I Microsoft is usually portrayed as a ruthless competitor,
prosecuted by antitrust authorities all over the world. However,
the Gates through the Bill and Melinda Gates Foundation are
the most important donor in the development of a vaccine
against malaria, among other things.

6. What is the pro…tability of socially responsible …rms?
330
280
230
180
130
80
12/93 8/94 4/95 12/95 8/96 4/97 12/97 8/98 4/99 12/99 8/00 4/01 12/01 8/02 4/03 12/03 8/04 4/05
DJSI World (in USD) MSCI World (in USD)

7. Corporate Social Responsibility: The Starbucks Example

8. Corporate Social Responsibility: The Starbucks Example
I Starbucks has created the Co¤ee and Farmer Equity
(C.A.F.E.) guidelines.
I A supplier needs to be certi…ed by a third-party so that it
meets some minimum requirements on product quality and
economic transparency and scores su¢ cient points in two
dimensions:
I Social Responsibility (minimum wage, overtime regulation,
freedom of association, regulation of child labor/forced labor
and discrimination) ,
I Environmental Leadership (water-quality protection,
maintenance of natural vegetation, reduction of agrochemical
use, waste-management, energy conservation).
I Suppliers that score above 80% receive an additional premium
of $0.05 per pound.

9. Corporate Social Responsibility
I Other examples of leading …rms adopting CSR actions
I IKEA avoided the use of child labor by Indian rug makers.
I Ben & Jerry is an eco-friendly ice-cream maker.
I Oil companies invest in renewable energies.
I More than 30 large banks have joined the Equador Principles
(2002). These principles establish sustainability standards
required for projects they …nance.

10. How can we explain the pro…tability of socially responsible
…rms?
I Although, there exist other reasons (relational contracts, avoid
a regulatory response, etc...) it is key the activism of
consumers, that internalize in their purchasing decisions the
externalities generated by their consumption.
I This is pure prosocial behavior since the direct impact of any
given consumer is negligible.

11. How can we explain the pro…tability of socially responsible
…rms?
I Our hypothesis: Activist Consumers take into account in their
decisions the social behavior of the …rm. Firms respond to
these preferences.

12. CSR as a credence good.
I CSR is often related to the supply of credence attributes
attached to the goods
I conditions under which the product is produced (e.g., child
labor), externalities associated with production (e.g. pollution),
how workers are treated and how well they are paid, hidden
hazards associated with consumption of the product, etc.
I Most severe type of information asymmetry
I since consumers cannot learn either through search or
experience on the unobservable credence attributes.
I Transparency lies at the core of CSR
I If consumers do not directly observe CSR by …rms and they do
not trust the information about the …rms, then how will
consumers be willing to pay a premium for the supply of the
CSR atributes?

13. Incentives, Imperfect Information and CSR.
I Main Idea: CSR requires accurate information regarding …rm
behavior.
I Consumers receive information for several channels (some of
them bias) mostly through the media and that this
information is noisy.
I Generally, governments, interest groups, and …rms themselves
generate and aggregate information that the media then
process and selectively communicate.
I For compensating the byas, we need independent actors:
social networks, NGO, etc.. and maybe for social networks
I It is also interesting to analyze the role of Goverment
Regulations regarding transparency.

14. CSR and the Pharmaceutical Industry
“We try never to forget that medicine is for the
people. It is not for pro…ts. The pro…ts follow, and if we
have to remembered that never fail to appear. The better
we have remembered, the larger they have been” (George
W. Merck, founder and past president of Merck).
I If fact, the pharmaceutical companies do well (…nancially) by
doing good (medically).

15. CSR and the Pharmatheutical Industry.

16. Do well (…nancially) by doing good (medically). . .
I Pharmaceutical companies have contributed to increase the
longevity (USA, 69.7-1960, 76.5-1997) and quality of life.
I Many diseases that are common …fty or more years ago are
now rare because of vaccines.
I Many conditions that were dangerous and untreatable thirty
years ago are now routinely treated by drugs.
I Some Pharmaceutical …rms have done e¤ort in poor countries
and with poor people in rich countries.
I Merck made a great e¤ort in eliminating river blindess.
I Some Pharmaceutical …rms use di¤erent prices for di¤erent
income groups

17. But there is not virtuous circle. . .
I The public perceptions of the pharmaceutical industry is low
I In 2005, less than 15 percent of the population agreed that
the pharmaceutical industry does a good job of serving its
customers.
I In 1998 that percentage had been about 50
I By comparison, 70 percent feel that the computer industry
does a good job of serving its customers, 60 percent feel the
same regarding the airline industry.

18. How we can explain this bad reputation?
I Me-too drugs-not link between price and quality improvement.
I Taking advantage of the lack of elasticity of the demand
(almost bribing doctors).
I Pricing of drugs in underdeveloped countries, specially AIDS
in South Africa.
I Lack of transparency with medical trials, some terrible cases
as with the painkiller Vioxx of Merks. . .

19. The Way Ahead
I For building the virtuous circle, we need more transparency:
better media coverage, customer associations, NGN, social
networks?
I CSR can be a source of comparative advantage for
pharmaceutical …rms, specially because:
I The trend to make marketing direct to consumers.
I Brand di¤erentiation is more important now, due to the
proliferation of me-too and generic drugs.
I Keep talent, innovation is the main source of pro…ts, incentives
in science are not only driven by money.