Credit card companies are bracing for the worst year in the industry’s history. A bank stress test issued this month by the Federal Reserve suggests that America’s largest banks – including Citigroup, Wells Fargo, Capital One and Bank of America – could expect $82.4 billion in credit card losses by the end of 2010. Regulators are calling the impending implosion an “adverse economic situation.” 

That’s putting it mildly.

Today’s adverse economic situation has had life-altering consequences for people around the world. A massive wave of home forclosures drove real estate values and property transactions down to their lowest point in twenty years. The stock market collapse destroyed an estimated 20 percent of the value of global assets and sent US unemployment rates skyrocketing to 15.8 percent. 

Now, credit cards companies are lowering credit lines, imposing extra fees and retroactively increasing interest rates on millions of consumers, causing more than 10 percent of people to default on their payments. 

“Credit card companies are part of an honest industry just trying to make 30 percent on a buck,” said the masterful Stephen Colbert in a recent bit that poked fun of the credit card crisis. “Being in a financial hole is as American as borrowing apple pie.” To be sure, living in debt is a way of life for many of us – starting from college and extending well into adulthood. But the obstacles to digging ourselves out of debt are piling high. 

Facing a desperate race to collect before consumers can claim bankruptcy, credit card companies are trying to squeeze out every last dime from every consumer they can. Last year alone they collected $18 billion in penalty fees. That statistic hits home, since research shows that most Americans are using credit cards for basic necessities like groceries, gas, car repairs, medical expenses and prescription drugs. Credit cards have become essential tools for functioning in today’s economy, but even so, there are few rules protecting consumers from abusive industry practices.

As research group Demos points out, it has been nearly twenty years since the credit card industry was deregulated with the promise of bringing greater competition and lower prices to consumers. That promise fell short big-time. “Under the shield of deregulation, credit card companies have shifted the cost of credit to individuals least able to afford it, while at the same time generating some of the highest profits in the entire banking sector,” Demos says. “As [our research] report shows, low-income individuals, African Americans, Latinos and single females bear the brunt of the cost of credit card deregulation through excessive fees and high interest rates.”

This brings up an important point, one that’s often debated by the so-called corporate responsibility community. Many of us like to think that market forces are the ultimate catalyst pressuring companies to behave ethically and responsibly. Pointing to worthy case examples, we hope that changing conditions and competitive pressures will pull industries in a more amenable direction. That optimism is not always warranted, though. Having been left to it’s own devices for so long, the credit card industry is the latest poster child for why we need a stronger regulatory net.

The CARD (Credit Card Accountability, Responsibility and Disclosure) Act of 2009 comes before the Senate today. This legislation, introduced by Banking Committee Chairman Chris Dodd, would amend the Consumer Credit Protection Act to ban abusive credit practices, enhance consumer disclosures and protect underage consumers.

“We are on the verge of a historic victory for hardworking American families that have suffered for far too long at the hands of credit card companies,” said Senator Dodd in a recent statement. “I am committed to working with President Obama and my colleagues to ensure that [CARD] passes with overwhelming support.  As President Obama said today, enough is enough.  It’s time to put an end to the abusive credit card practices that drive millions of American families further into debt.”

The bank lobby is strong in Washington. The industry asserts that new legislation could cripple its ability to deal with rising defaults, manage high-risk accounts and extend credit to certain people during the recession. 

In the event that the legislation does pass today, banks are expected to look to new revenue sources to make up for lost income. According to bank officials and trade groups, banks will likely target customers with sterling credit, who typically pay off their full balances at the end of each month. These customers can look forward to revived annual fees, curtailed cash-back rules, reduced rewards programs, and the immediate charging of interest on purchases made.

Going forward, it looks like people with great credit will have to subsidize those with riskier profiles. Fair? Probably not. But again, that’s beside the industry’s point.

Merck. Monsanto. ExxonMobil. Chevron. Citigroup. Goldman Sachs. Smithfield Foods.

What do these companies have in common? According to CRO magazine (formerly Business Ethics), they are among the world’s Best Corporate Citizens, setting the gold standard in governance, ethics and corporate social responsibility (CSR).

“When someone next asks you to define corporate transparency, show them this list,” touts the magazine. “[Our] 2009 CRO 100 Best Corporate Citizens List is the world’s best-known apples-to-apples comparison of Russell 1000 companies’ performance in environment, climate change, human rights, employee relations, philanthropy, financial and governance.”

While the CRO’s leading “apples” might have done laudable things, several are also involved in ongoing legal and public relations scuffles stemming from alleged ethical breaches and poor business judgement. For these “top 100” firms, that’s nothing new: 

•   Merck, whose Vioxx product gave rise to class action lawsuits over allegedly deceptive marketing practices in 2006, is once again accused of engaging in similar deceptive practices

•   Monsanto, which Amnesty International calls a “global corporate terrorist,” is using litigation as a tool to protect its market share and has filed dozens of lawsuits against family farmers across North America, alleging they “stole” airborne seeds

•   ExxonMobil, which has a history of environmental and human rights lawsuits, has yet to pay $92 million worth of Valdez spill-related damages to plaintiffs in Alaska

•   Chevron, which also has a history of environmental and human rights lawsuits, now argues that renewables “are not a mainstream business”

•   Citigroup, which in 2002 faced FTC charges for abusive lending practices,  was recently accused of lying to investors and its own employees about the risks inherent in several speculative, mortgage-backed securities funds. It also froze customer lines of credit after receiving $20 billion in government bailout money

•   Goldman Sachs, which in 2002 faced SEC lawsuits for securities fraud and conflicts of interest, recently changed accounting rules in order to hide December losses. It is also accused of being a serial violator of SEC regulations prohibiting long-outlawed “naked” short sales of stock

•   Smithfield Foods, which recently faced multiple environmental lawsuits, runs slaughterhouses in Mexico that some experts have linked to diseases like swine flu

CRO’s Best Citizens list sheds light on a critical problem that keeps CSR on the sidelines of many corporate agendas: the industry is too ambiguous for its own good. As Paul Hawken argued several years ago in his critique of the $2.7 trillion socially responsible investment (SRI) industry: “The term ‘socially responsible’ is so broad it is meaningless...There are no standards, no definitions, and no regulations. Anyone can join; anyone can call his or her fund an SRI fund.” 

To be sure, the CSR industry’s lack of universal standards and criteria leave many questions unanswered. But research indicates that it doesn't need to be this way.

Companies that dabble in every conceivable CSR facet (community, diversity, environment, human rights, etc.) tend to be less effective than companies that pursue deliberate strategies in a focused area – both in terms of making a substantive social and environmental impact, and in terms of generating a financial return on their corporate responsibility investment. That was a key finding of my 2007 CSR effectiveness study, and it runs contrary to the way that companies are rated on “Best Citizens” lists.

According to the CRO’s methodology, Best Citizens lists are compiled by quantitatively rating companies across a breadth of performance dimensions:  environment, climate change, human rights, employee relations, philanthropy, financial performance, governance and lobbying activities. Scores are assigned to each category (some categories count more than others) and those companies with the highest cumulative scores win. Though the CRO suggests that this breadth approach to CSR performance evaluation yields a more holistic view, the result is that any company, regardless of history or industry, can be included for consideration. Halliburton and Blackwater (Xe) have yet to make the cut, but that may only be a matter of time.

On the other hand, as mentioned above, my research clearly demonstrates that depth works better than breadth. Rather than taking on every CSR issue at once, the companies producing the best triple bottom-line results (High-Purpose Companies) go deep in one or two particular areas where they know they can make the biggest difference. They find common ground between their core strengths and a critical problem that needs solving – and thus develop profitable solutions to that end. High-Purpose Companies have the financial incentive to create social and environmental value. That’s not always the case at the firms making CRO’s cut, which is why the magazine risks missing the point.

If the CSR industry is to be taken seriously in the future, then it needs to reward companies for producing value, not just preaching values.  Now is the time for an industry makeover. Let’s start with objective standards, critical thinking and a much stronger voice. 

The stocks of major U.S. meat companies plunged last week in the wake of reports tying the swine flu outbreak to conditions inside confined animal feeding operations (CAFOs). Shares of Smithfield Foods – a company with CAFOs in Mexico that have been scrutinized in connection with the outbreak – saw the biggest loss among U.S. processors, dropping 12 percent. Tyson and Hormel Foods were also affected, posting share value declines of 9 and 2 percent respectively.

The pork industry’s response to the negative publicity has been swift, if not expected: “We deny completely that the influenza virus affecting Mexico originated in pigs,” said the National Organization of Pig Production and Producers in a statement. Smithfield, the world’s largest pig producer, categorically asserted that “there have been no clinical signs or symptoms of the presence of North American influenza in Smithfield's swine herd or its employees at its joint ventures in Mexico.” 

Although criticism of the meat industry is not new, for many people, the swine flu outbreak brought into sharper focus the harsh reality of CAFOs and the health and environmental ramifications they create.  While we do not know for certain how this particular flu strain emerged, it has raised fundamental questions: How did the meat industry get to where it is today? And at what cost?

For centuries, independent farms – with their traditional methods for livestock handling, feeding and processing – were the primary sources of meat.  After WWII, however, demand for meat soared, compelling producers to abandon their traditional methods in favor of more efficient, factory-like processes in order to meet that demand.  As a result today’s meat industry is highly concentrated and mechanized.  It also is dominated by a relatively small group of mega-players.  Data from the University of Missouri shows that most pork and beef production in the U.S. is controlled by just a handful of corporations, including Smithfield, Tyson, Swift & Co. and Cargill.  Processing powerhouses such as these operate approximately 238,000 CAFOs worldwide, slaughtering 9.1 billion animals on their way to market.  

Such efficiencies come with a huge environmental price tag.  Those same 238,000 CAFOs produce an estimated 500 million tons of waste each year. The U.S. Environmental Protection Agency reports that hog, chicken and cattle waste has polluted 35,000 miles of rivers in 22 states and contaminated groundwater in 17 states. The European Union says that CAFOs are responsible for 18 percent of global warming. In response to these alarming statistics, consumer groups like the Organic Consumers Association have commenced a petition drive calling for an outright ban on CAFOs and the initiation of governmental reviews of existing practices and standards.

In this era of shareholder and consumer activism, however, many people are not waiting for government intervention and are taking matters into their own hands.  More consumers are either choosing vegetarian options, or buying meat only from companies that have demonstrated an authentic commitment to more traditional and sustainable practices.

At California-based Hearst Ranch, for instance, traditional methods are the only ones considered:  “Our cattle live a natural existence as free-range foragers, roaming the 150,000 acres comprised by our two ranches and grazing on a diet of native grasses like rye, soft chess, filaree, clovers, brassicas, purple needlegrass and birdsfoot trefoil,” explains Hearst Ranch Beef division manager Brian Kenny. “We rotate our cattle pastures throughout the year, using well-managed grazing to increase the biodiversity of our grasses and improve the soil fertility of our working landscape.”

Kenny explains that CAFO market externalities stem from a business model that places quantity, efficiency and consistency above everything else. “Whereas it takes 16 to 18 months to raise a finished CAFO steer or heifer to an optimal weight of between 1,200 and 1,300 pounds, it takes 18 to 24 months to raise a free-range, grass-fed steer to 1100 pounds.” 

Permanent pasture operations like Hearst’s are seasonal, since both grass and animals are at full bloom only so many months per year. But there are significant upsides. “We can’t count on efficiency,” Kenny says, “but our operation fits within a natural resource capacity and our low-stress handling of the cattle results in a higher quality, tender product.”

CAFO cattle live cramped inside confinement pens where they are fed high-carbohydrate (grain-based) diets. That makes them significantly fattier and less healthy. On the other hand, because Hearst’s cattle are pasture-raised and grass-fed, its beef is leaner and healthier, providing ten times more beta-carotene and three times more omega-3 fatty acids than other beef.  “CAFOs can use tools like sub-therapeutic hormones and antibiotics to produce higher quality beef,” says Kenny. “Our quality comes from good grazing management, good genetics, and low-stress handling.”

Unfortunately while many meat companies claim to offer “sustainable” or “grass fed” meat products, the USDA’s standards for these labels are lax and somewhat misleading. Producers can label their meats “grass-fed” if animals were fed grass only for short periods of their lifetime. Additionally, “sustainably raised” doesn’t necessarily mean pasture raised. 

Names can also be misleading. Niman Ranch, for instance, isn’t much of a ranch anymore. The company has grown rapidly since its inception in the 1970s and it now boats a large operation that processes and sells nearly $85 million worth of beef, pork and lamb annually. Founder Bill Niman left the company after disputes with shareholders over money and animal protocols. He now reportedly refuses to eat their products.

The meat industry’s relentless quest for efficiency, along with loose standards and an apparent lack of transparency, can steer well-meaning consumers in the wrong direction. That fact, combined with the recent surge in health crises originating from CAFO animal diseases like swine flu, avian flu, West Nile virus, bluetongue, and foot and mouth disease, gives meat eaters good reason to think twice before ordering the next cut.

Dennis Kozlowski is outraged. “I sit here and read about a $150 billion bailout of AIG. I compare it to a $6,000 shower curtain,” said the former Tyco CEO in an interview from his jail cell a few weeks ago. “It’s hard to reconcile the two. You couldn’t even closely draw a comparison, at all.”

Kozlowski is absolutely right.

The premier financial institutions of today – AIG, Barclay’s, Bank of America, Merrill Lynch, Citigroup, Goldman Sachs  – make Enron’s 2001 accounting scandal look like child’s play. Evidently banking giants now make a habit out of inflating the value of certain assets, moving losses off the books and convincing accountants to look the other way. Such tactics have put investors at risk and cost taxpayers hundreds of billions of dollars. Meanwhile, fewer than 5 percent of bailed out banks will say where the money went.

Have these banks learned a single lesson from Enron’s past mistakes? Apparently not. And what’s more, the Sarbanes-Oxley Act (SOX) – which was created in an effort to improve disclosure provisions, ensure auditor independence and strengthen corporate governance procedures – hasn’t made a drip of difference. There seems to be less financial transparency and oversight today than there was before SOX was instated in 2002.

But even as legislation flounders and banking giants stay their course, the public moves in a new direction. A record number of people are flocking toward ethical, transparent and financially solvent companies like Boston-based Wainwright Bank & Trust and Bristol-based Triodos Bank. 

Here are two community banks that, albeit on a smaller scale, manage to thrive despite the ongoing credit and investor confidence crises. While Triodos experienced 8 percent growth during 2008, Wainwright’s first quarter 2009 profits increased an impressive 33 percent. 

“All this turmoil in the financial markets has continued to create opportunities for us to capture additional market share,” says Wainwright founder and co-chairman Richard Glassman. “We are pleased that there continues to be a market for our products and approach.”

The “approach” of which Glassman speaks is key. In fact, both Wainwright and Triodos sell the same products that you can find at any big bank – checking accounts, savings accounts, loans, etcetera. That’s not what drives their performance. It’s how they sell their products, how they conduct business overall, that sets them apart from their peers. 

At Wainwright a socially progressive agenda represents an ever-important second bottom line to the company. “One platform sustains the other,” Glassman explains. “Our business success is fueled by the difference we make in our community.” 

To date Wainwright has issued over $700 million in loans to community development projects like affordable housing and HIV/AIDS services. Remarkably, it has experienced virtually no defaults on those loans. In addition Wainwright has the highest level of customer loyalty and lowest rate of employee turnover in its industry. 

Triodos also thrives by helping to improve people’s lives for the better.  “We want to act as a bridge between savers and investors on the one hand, and sustainable companies and projects that need financing on the other,” explains board Chairman Peter Blom. “[With us] savers and investors know what happens with their money. In this respect, the banking sector has failed badly in recent years.”

Wainwright and Triodos aren’t the only ones profiting from systemic failures on Wall Street. Community banks across America and Europe are benefiting, as customers seek institutions they can trust. 

At the UK’s Co-Operative Bank for instance, pre-tax 2008 profits increased 69 percent from 2007. At  California Community Bank, first quarter 2009 growth increased 26 percent from 2008. And at Liberty Bell Bank in Cherry Hill, N.J., first quarter 2009 growth increased 14 percent.

A recent survey conducted by Independent Community Bankers confirms that these results are not atypical. Community banks are getting new customers at a faster rate than in the past, with 57 percent experiencing an increase in new retail customers and 47 percent seeing an increase in new business customers compared to last year. 

Though not immune to the challenges facing all financial institutions, community banks do offer realistic and profitable alternatives to traditional banking methods. 

To start with, rather than serving the narrow interests of a few shareholders, community banks acknowledge wider stakeholder communities. As opposed to treating lower-income customers and charitable organizations as a liability, they view them as a worthy opportunity. Instead of hiding risk, they openly disclose their investments and methods. As an alternative to pushing product, they prioritize people and relationships. And in lieu of imposing pre-set terms, many community banks structure loans around the needs of individual borrowers. 

“When Wainwright was founded, it was one of fourteen thousand banks in an undifferentiated industry with fungible products and commodity pricing,” says Glassman. “Now we’ve ended up as one of our region’s best-known banks with a constituency that knows exactly who we are and absolutely loves what we do differently.”

The fact is that community banks are genuinely different, which is why they are the preferred choice by more people around the world. Their lessons turn conventional banking wisdom on its head. Let’s just hope it stays that way.

 Why do some companies win public favor and others lose it? That’s a hot topic now that more people distrust corporations than ever before. 

The trust deficit is clearly a trend on the rise. Back in 2005, a Roper poll showed that 72 percent of respondents felt that corporate wrongdoing was “widespread,” up from 66 percent the year before. A subsequent survey issued by the Customer Care Alliance reported that 90 percent of people were dissatisfied with the way companies treated them, while 64 percent felt “rage” toward corporations. In 2008, a Reputation Institute study revealed that 13 of 24 industries had “weak” reputations based on the perspective of the general public. And in 2009, things have grown worse.

According to pubic relations and research group Edelman, global faith in business has hit a 10-year low, with 62 percent of people worldwide trusting companies less today than they did a year ago, and 77 percent refusing to buy from companies they distrust. 

“It has been a catastrophic year for business, well beyond the evident destruction in shareholder value and need for emergency government funding,” says Edelman's president and CEO Richard Edelman in a recent press release. “Our [2009 Trust Barometer] survey confirms that it’s going to be harder to rebuild our economies because no institution has captured the trust that business has lost.” 

Dismal as the current state may seem, it is a crucial one for companies to strategically face. They can start by asking smarter questions. For instance, it’s not so much about which companies and industries are among the world’s most and least respected, but why. What attributes and values do the winners and losers share?

The Reputation Institute says that outstanding leadership, financial performance, innovation, products and governance are the qualities that lead to a strong reputation. Boston College indicates that corporate citizenship plays an important role. Having spent five years researching this issue myself, I’ve found a common thread that might trump them all: purpose.

True High-Purpose Companies – those companies driven by a social or environmental cause to the extent where their financial performance depends on it –are among the most respected companies in the world. Conversely, Low-Purpose Companies – those companies whose social and environmental postures run contrary to shareholder interests – tend to be the some of world’s least respected. In true High-Purpose Companies, purpose directly influences everything from the product line to the innovation cycle, growth strategy, leadership, governance, citizenship  efforts and ultimately, the financial performance of the business. Take Toyota Motor Company, for instance. 

Toyota, which was just ranked “The World’s Most Respected Company” by The Reputation Institute, stands for the purpose of “making sustainable mobility a reality.” This purpose is clearly reflected throughout Toyota. Hybrid Synergy Drive, the Prius, zero waste manufacturing facilities and multi-dimensional quality models are just a few examples of how tangible the manifestation of purpose is at Toyota – and how crucial it is to shareholders.

There are dozens of similar examples. GE, Fortune magazine’s “Most Admired” company of 2008, serves the purpose of “providing imaginative solutions to the mounting challenges to our ecosystem.” JetBlue, which JD Power & Associates ranked “The Highest in Customer Satisfaction” three years in a row, aims to: “bring humanity back to air travel.” Patagonia, which Fortune magazine dubbs “The Coolest Company on the Planet,” exists in order to “inspire solutions to the environmental crisis.”

High-Purpose Companies are widely known and revered for their purpose, which is why so many people love them. Such companies might not be perfect, but they are authentic in the sense that their actions and investments match their words. That’s not case in Low-Purpose Companies, which tend to say one thing and do another. 

For example, Halliburton says: “[our] every action is guided by our vision to be welcomed as a good corporate neighbor,” but The Wall Street Journal reports that it is "the company with the worst corporate reputation." Monsanto promises: “integrity is the foundation for everything we do,” yet Amnesty International and the Organic Consumers Association  consider it a "global corporate terrorist." Allstate Insurance claims that its customers are “in good hands,” while the FBIC counts it as one of the Nation’s "top three worst insurers." ExxonMobil insists that it is effectively “taking on the world’s toughest energy challenges,” but Harris Interactive rates it as one of the world’s "least trusted."

The fact is that no ad campaign, no slogan, no celebrity and no promise can compensate for a lack of trust and the feeling that one is being manipulated, fooled or lied to. That’s why authenticity and purpose play such a vital role in establishing corporate reputation. 

While not every respected company in the world is a High-Purpose Company, every High-Purpose Company is a respected company. The strategic pursuit of purpose is therefore an effective tool that companies can use to improve their impact on stakeholders, their perceived character and ultimately, their worth.