Wednesday, November 16, 2005
The Myth of CSR
By: Deborah Doane, 11/04/05
The Corporate Social Responsibility (CSR) Movement has grown in recent years from a fringe activity by a few earnest companies, like The Body Shop, and Ben & Jerry’s, to a highly visible priority for traditional corporate leaders from Nike to McDonald’s. Reports of good corporate behavior are now commonplace in the media, from GlaxoSmithKline’s donation of antiretroviral medications to Africa, to Hewlett-Packard’s corporate volunteering programs, to Starbucks’ high-volume purchases of Fair Trade coffee. In fact, CSR has gained such prominence that the Economist devoted a special issue to denouncing it earlier this year.
Although some see CSR as simply philanthropy by a different name, it can be defined broadly as the efforts corporations make above and beyond regulation to balance the needs of stakeholders with the need to make a profit. Though traces of modern-day CSR can be found in the social auditing movement of the 1970s, it has only recently acquired enough momentum to merit an Economist riposte. While U.S. and European drivers for CSR have differed slightly, key events, such as the sinking of Shell’s Brent Spar oil rig in the North Sea in 1996, and accusations of Nike and others’ use of “sweatshop labor,” triggered the first major response by big business to the uprisings against the corporate institution. Naomi Klein’s famous tome, “No Logo,”(1) gave voice to a generation that felt that big business had taken over the world, to the detriment of people and the environment, even as that generation was successfully mobilizing attacks on corporate power following the Seattle anti-globalization riots in 1999.
Rather than shrink away from the battle, corporations emerged brandishing CSR as the friendly face of capitalism, helped, in part, by the very movement that highlighted the problem of corporate power in the first place. NGOs, seeing little political will by governments to regulate corporate behavior, as free-market economics has become the dominant political mantra, realized that perhaps more momentum could be achieved by partnering with the enemy. By using market mechanisms via consumer power, they saw an opportunity to bring about more immediate change. So, organizations that address social standards in supply chains, such as the Fair Label Association in the United States or the United Kingdom’s ethical Trading Initiative, have flourished.
The United Nations partnered with business to launch its own Global Compact, which offered nine principles relating to human rights and the environment, and was hailed as the ethical road map for the future. And while socially responsible investment had been popular in some circles for years, eventually the mainstream investment community cottoned onto CSR: In 1999, Dow Jones created the Dow Jones Sustainability Indexes, closely followed by the FTSE4Good. All of these initiatives have been premised on the notion that companies can ‘do well’ and ‘do good’ at the same time – both saving the world and making a decent profit, too. The unprecedented growth of CSR may lead some to feel a sense of optimism about the power of market mechanisms to deliver social and environmental change. But markets often fail, especially when it comes to delivering public goods; therefore, we have to be concerned that CSR activities are subject to the same limitations of markets that prompted the movement in the first place.
Making Markets Work?
At face value, the market has indeed been a powerful force in bringing forward some measurable changes in corporate behavior. Most large companies now issue a voluntary social and environmental report alongside their regular annual financial report; meanwhile the amount of money being poured into socially responsible investing (SRI) funds has been growing at an exponential rate, year over year. Some socially linked brands, such as Fair Trade, are growing very quickly. Ethical consumerism in the United Kingdom was worth almost £25 billion in 2004, according to a report from the Co-operative Bank.(2)
The Economist article argued that the only socially responsible thing a company should do is to make money – and that adopting CSR programs was misguided, at best. But there are some strong business incentives that have either pushed or pulled companies onto the CSR bandwagon. For example, companies confronted with boycott threats, as Nike was in the 1990s, or with the threat of high-profile lawsuits, as McDonald’s is over obesity concerns, may see CSR as a strategy for presenting a friendlier face to the public. Once launched, CSR initiatives may provoke changes in basic practices inside some companies. Nike is now considered by many to be the global leader when it comes to improving labor standards in developing-country factories. The company now leads the way in transparency, too. When faced with a lawsuit over accusations of sweatshop labor, Nike chose to face its critics head-on and this year published on its Web site a full list of its factories with their audited social reports. And Nike is not alone. A plethora of other brands have developed their own unique strategies to confront the activists, with varying degrees of success. But no one could reasonably argue that these types of changes add up to a wholesale change in capitalism as we know it, nor that they are likely to do so anytime soon.
One problem here is that CSR as a concept simplifies some rather complex arguments and fails to acknowledge that ultimately, trade-offs must be made between the financial health of the company and ethical outcomes. And when they are made, profit undoubtedly wins over principles. CSR strategies may work under certain conditions, but they are highly vulnerable to market failures, including such things as imperfect information, externalities, and free riders. Most importantly, there is often a wide chasm between what’s good for a company and what’s good for society as a whole. The reasons for this can be captured under what I’ll argue are the four key myths of CSR.
Myth #1: The market can deliver both short-term financial returns and long-term social benefits.
One assumption behind CSR is that business outcomes and social objectives can become more or less aligned. The rarely expressed reasoning behind this assumption goes back to the basic assumptions of free-market capitalism: People are rational actors who are motivated to maximize their self-interest. Since wealth, stable societies, and healthy environments are all in individuals’ self-interest, individuals will ultimately invest, consume, and build companies in both profitable and socially responsible ways. In other words, the market will ultimately balance itself. Yet, there is little if any empirical evidence that the market behaves in this way. In fact, it would be difficult to prove that incentives like protecting natural assets, ensuring an educated labor force for the future, or making voluntary contributions to local community groups actually help companies improve their bottom line.
While there are pockets of success stories where business drivers can be aligned with social objectives, such as Cisco’s Networking Academies, which are dedicated to developing a labor pool for the future, they only provide a patchwork approach to improving the public good. In any case, such investments are particularly unlikely to pay off in the two- to four-year time horizon that public companies, through demands of the stock market, often seem to require. As we all know, whenever a company issues a “profits warning,” the markets downgrade its share price. Consequently, investments in things like the environment or social causes become a luxury and are often placed on the sacrificial chopping block when the going gets rough. Meanwhile, we have seen an abject failure of companies to invest in things that may have a longer-term benefit, like health and safety systems.
BP was fined a record $1.42 million for health and safety offenses in Alaska in 2004, for example, even as Lord John Browne, chief executive of BP, was establishing himself as a leading advocate for CSR, and the company was winning various awards for its programs. At the same time, class-action lawsuits may be brought against Wal-Mart over accusations of poor labor practices, yet the world’s largest and most successful company is rewarded by investors for driving down its costs and therefore its prices. The market, quite frankly, adores Wal-Mart. Meanwhile, a competitor outlet, Costco, which offers health insurance and other benefits to its employees, is being pressured by its shareholders to cut those benefits to be more competitive with Wal-Mart.(3) CSR can hardly be expected to deliver when the short-term demands of the stock market provide disincentives for doing so. When shareholder interests dominate the corporate machine, outcomes may become even less aligned to the public good. As Marjorie Kelly writes in her book, “The Divine Right of Capital”: “It is inaccurate to speak of stockholders as investors, for more truthfully they are extractors.”(4)
Myth #2: The ethical consumer will drive change.
Though there is a small market that is proactively rewarding ethical business, for most consumers ethics are a relative thing. In fact, most surveys show that consumers are more concerned about things like price, taste, or sell-by date than ethics.(5) Wal-Mart’s success certainly is a case in point.
In the United Kingdom, ethical consumerism data show that although most consumers are concerned about environmental or social issues, with 83 percent of consumers intending to act ethically on a regular basis, only 18 percent of people act ethically occasionally, while fewer than 5 percent of consumers show consistent ethical and green purchasing behaviors.(6) In the United States, since 1990, Roper ASW has tracked consumer environmental attitudes and propensity to buy environmentally oriented products, and it categorizes consumers into five “shades of green”: True-Blue Greens, Greenback Greens, Sprouts, Grousers, and Basic Browns. True-Blue Greens are the “greenest” consumers, those “most likely to walk their environmental talk,” and represent about 9 percent of the population.
The least environmentally involved are the “Basic Browns,” who believe “individual actions (such as buying green products or recycling) can’t make a difference” and represent about 33 percent of the population.(7) Joel Makower, co-author of “The Green Consumer Guide,” has traced data on ethical consumerism since the early 1990s, and says that, in spite of the overhyped claims, there has been little variation in the behavior of ethical consumers over the years, as evidenced by the Roper ASW data. “The truth is, the gap between green consciousness and green consumerism is huge,” he states.(8) Take, for example, the growth of gas-guzzling sport-utility vehicles. Even with the steep rise in fuel prices, consumers are still having a love affair with them, as sales rose by almost 8 percent in 2004. These data show that threats of climate change, which may affect future generations more than our own, are hardly an incentive for consumers to alter their behavior.(9)
Myth #3: There will be a competitive “race to the top” over ethics amongst businesses.
A further myth of CSR is that competitive pressure amongst companies will actually lead to more companies competing over ethics, as highlighted by an increasing number of awards schemes for good companies, like the Business Ethics Awards, or Fortune’s annual “Best Companies to Work For” competitions. Companies are naturally keen to be aligned with CSR schemes because they offer good PR. But in some cases businesses may be able to capitalize on well-intentioned efforts, say by signing the U.N. Global Compact, without necessarily having to actually change their behavior. The U.S.-based Corporate Watch has found several cases of “green washing” by companies, and has noted how various corporations use the United Nations to their public relations advantage, such as posing their CEOs for photographs with Secretary-General Kofi Annan.(10) Meanwhile, companies fight to get a coveted place on the SRI indices such as the Dow Jones Sustainability Indexes. But all such schemes to reward good corporate behavior leave us carrying a new risk that by promoting the “race to the top” idea, we tend to reward the “best of the baddies.”
British American Tobacco, for example, won a UNEP/Sustainability reporting award for its annual social report in 2004.(11) Nonetheless, a skeptic might question why a tobacco company, given the massive damage its products inflict, should be rewarded for its otherwise socially responsible behavior. While companies are vying to be seen as socially responsible to the outside world, they also become more effective at hiding socially irresponsible behavior, such as lobbying activities or tax avoidance measures. Corporate income taxes in the United States fell from 4.1 percent of GDP in 1960 to just 1.5 percent of GDP in 2001.(12) In effect, this limits governments’ ability to provide public services like education. Of course, in the end, this is just the type of PR opportunity a business can capitalize on. Adopting or contributing to schools is now a common CSR initiative by leading companies, such as Cisco Systems or European supermarket chain Tesco.
Myth #4: In the global economy, countries will compete to have the best ethical practices.
CSR has risen in popularity with the increase in reliance on developing economies. It is generally assumed that market liberalization of these economies will lead to better protection of human and environmental rights, through greater integration of oppressive regimes in the global economy, and with the watchful eye of multinational corporations that are actively implementing CSR programs and policies. Nonetheless, companies often fail to uphold voluntary standards of behavior in developing countries, arguing instead that they operate within the law of the countries in which they are working. In fact, competitive pressure for foreign investment among developing countries has actually led to governments limiting their insistence on stringent compliance with human rights or environmental standards, in order to attract investment. In Sri Lanka, for example, as competitive pressure from neighboring China has increased in textile manufacturing, garment manufacturers have been found to lobby their government to increase working hours.
In the end, most companies have limited power over the wider forces in developing countries that keep overall wage rates low. Nevertheless, for many people a job in a multinational factory may still be more desirable than being a doctor or a teacher, because the wages are higher and a worker’s rights seem to be better protected.
What Are the Alternatives to CSR?
CSR advocates spend a considerable amount of effort developing new standards, partnership initiatives, and awards programs in an attempt to align social responsibility with a business case, yet may be failing to alter the overall landscape. Often the unintended consequences of good behavior lead to other secondary negative impacts, too. McDonald’s sale of apples, meant to tackle obesity challenges, has actually led to a loss of biodiversity in apple production, as the corporation insists on uniformity and longevity in the type of apple they may buy – hardly a positive outcome for sustainability.(13)
At some point, we should be asking ourselves whether or not we’ve in fact been spending our efforts promoting a strategy that is more likely to lead to business as usual, rather than tackling the fundamental problems. Other strategies – from direct regulation of corporate behavior, to a more radical overhaul of the corporate institution, may be more likely to deliver the outcomes we seek. Traditional regulatory models would impose mandatory rules on a company to ensure that it behaves in a socially responsible manner. The advantage of regulation is that it brings with it predictability, and, in many cases, innovation. Though fought stridently by business, social improvements may be more readily achieved through direct regulation than via the market alone. Other regulatory-imposed strategies have done more to alter consumer behavior than CSR efforts. Social labeling, for example, has been an extremely effective tool for changing consumer behavior in Europe.
All appliances must be labeled with an energy efficiency rating, and the appliances rated as the most energy efficient now capture over 50 percent of the market. And the standards for the ratings are also continuously improving, through a combination of both research and legislation. Perhaps more profoundly, campaigners and legal scholars in Europe and the United States have started to look at the legal structure of the corporation. Currently, in Western legal systems, companies have a primary duty of care to their shareholders, and, although social actions on the part of companies are not necessarily prohibited, profit-maximizing behavior is the norm. So, companies effectively choose financial benefit over social ones.(15) While a handful of social enterprises, like Fair Trade companies, have forged a different path, they are far from dominating the market. Yet lessons from their successes are being adopted to put forward a new institutional model for larger shareholder-owned companies. In the United Kingdom, a coalition of 130 NGOs under the aegis of the Corporate Responsibility Coalition (CORE), has presented legislation through the Parliament that argues in favor of an approach to U.K. company law that would see company directors having multiple duties of care – both to their shareholders and to other stakeholders, including communities, employees, and the environment. Under their proposals, companies would be required to consider, act, mitigate, and report on any negative impacts on other stakeholders.(16)
Across the pond, Corporation 20/20, an initiative of Business Ethics and the Tellus Institute, has proposed a new set of principles that enshrines social responsibility from the founding of a company, rather than as a nice-to-have disposable add-on. The principles have been the work of a diverse group including legal scholars, activists, business, labor, and journalism, and while still at the discussion phase, such principles could ultimately be enacted into law, stimulating the types of companies that might be better able to respond to things like poverty or climate change or biodiversity. Values such as equity and democracy, mainstays of the social enterprise sector, take precedence over pure profit making, and while the company would continue to be a profit-making entity in the private realm, it would not be able to do so at a cost to society.
Of course, we are a long way from having any of these ideas adopted on a large scale, certainly not when the CSR movement is winning the public relations game with both governments and the public, lulling us into a false sense of security. There is room for markets to bring about some change through CSR, but the market alone is unlikely to bring with it the progressive outcomes its proponents would hope for. While the Economist argument was half correct – that CSR can be little more than a public relations device – it fails to recognize that it is the institution of the corporation itself that may be at the heart of the problem. CSR, in the end, is a placebo, leaving us with immense and mounting challenges in globalization for the foreseeable future.
1 N. Klein, No Logo: Taking Aim at the branding Bullies (UK: Harper-Collins, 2001).
2 2 Co-operative Bank, 2004 Ethical Purchasing Index, http://www.co-operative-bank.co.uk/servlet/Satellite?cid=1077610044424&pagename=CoopBank%2FPage%FtplPageStandard&c=Page.
3 A. Zimmerman, “Costco’s Dilemma: Be Kind to Its Workers, or Wall Street?” Wall Street Journal, march 26, 2004
4 M. Kelly, The Divine Right of Capital:Dethroning the Corporate Aristocracy (San Francisco: Berrett Koehler, 2003).
5 UK Institute of Grocery Distributors, 2003
6 “Who are the Ethical Consumers?” Co-operative 2000
7 Green Gauge Report 2002, Roper ASW, as related by Edwin Stafford
10 “Greenwash + 10: The UN’s Global Compact, Corporate Accountability, and the Johannesburg Earth Summit,” Corporate Watch, January 2002.
11 “The Global Reporters 2004 Survey of Corporate Sustainability Reporting.” SustainAbility, UNEP, and Standard & Poor’s.
12 J. Miller, “Double Taxation Double Speak: Why Repealing Tax Dividends is Unfair,” Dollars and Sense, March/April2003.
13 G. Younge, “McDonald’s Grabs a Piece of the Apple Pie: ‘Healthy’ Menu Changes Threaten the Health of Biodiversity in Apples,” The Guardian, April 7, 2005.
14 Ethical Purchasing Index, 2004
15 E. Elhauge, “Sacrificing Corporate Profits in the Public Interest,” New York University Law Review 80, 2005.
16 See www.corporate-responsibility.org.
Thursday, September 15, 2005
The ISO and social responsibility: breakdown or breakthrough in Bangkok
There is rising concern that the second meeting of the ISO Working Group on Social Responsibility, to be held in Bangkok on 26-30 September, could be a “make or break” session.
The outcome will depend on how well two basic issues are handled: purpose (what do we want to do?), and participation (who needs to be around the table to do it?). It is clear that there are serious problems on both fronts. Unless the experts in Bangkok agree to focus on something achievable, there is little likelihood that things will get much easier. The resulting impact could be damaging – on the International Organisation for Standardisation and on the corporate social responsibility movement in general.
On the issue of what a “social responsibility guidance standard” would do, most experts are still in defensive mode: there are many clear and forceful opinions on what it should not do, but there is no clear vision of what it should do. So we know that it will not be a management system standard; that it will not be open to certification; and that it will not conflict with existing standards.
And the what still appears to be confused with the why. When asked why ISO should be involved in social responsibility, most people refer not to the need for a particular international social responsibility standard, but rather to the value of ISO’s brand name and distribution channels. That is, not in terms of what ISO can create, but in terms of how it can market social responsibility to a mainstream audience.
So, more than a year after ISO decided to launch an social responsibility process, there is still no sense of drive or vision around what ISO should or could do. There is only a long laundry list of possible elements that raises as many questions as it answers.
This has important consequences for the levels of interest that experts and organisations from all backgrounds are (or, in most cases, are not) showing in the process. People do not get excited by not developing something; they get excited by a clear and positive vision, even if it is a modest one.
Any discussion about social responsibility invites diverse and often deeply felt viewpoints. An international, non-governmental process purporting to help define and respond to societal expectations needs to reflect and address these different perspectives. But it also has to find a way to ensure that the role of government is not undermined.
To its credit, ISO has stepped out of its normal structure for this social responsibility process. Normally, experts are organised only along national lines, e.g. experts are from Canada, Chile, Chad or China. Recognising that minority viewpoints tend to get lost in the development of a national consensus, ISO has created six stakeholder categories in which experts are grouped for the social responsibility process: industry, labour, consumers, non-governmental organisation, government, and “other”. Each country can send one expert for each of these six categories – which helps to ensure that minority views are not homogenized out of existence. International and regional organisations can also participate directly and fully through liaison affiliations.
On the surface, this trend away from expert-based towards representative-based standardisation is a positive development. The problem is, however, that complex problems are not solved by single actions. The complex problem is that ISO does not pay for the development of the products that it later sells. ISO is used to developing technical standards that have clear commercial implications. Companies will pay for something that they will benefit from.
The situation is starkly different for standards with no commercial applications that are of interest to non-commercial organisations. Many experts have been wondering where the progressive-minded multinational companies are hiding in the ISO process. Response: many are not there because they do not think that they will have much to learn (or fear) from this standard, i.e. no commercial interest means no justification for the costs, which means no participation.
The ISO social responsibility process is suffering from the classic tragedy of the commons – further complicated by the lack of a clear positive vision that excites proactive engagement. What we are left with is organisations struggling to convince their boards and donors that they should be involved – if for nothing else, for damage limitation. This further feeds the negative agenda in the ISO’s working group.
But does ISO really need to ensure that six experts from each stakeholder group from each of its 149 national members are involved in the process? Hopefully not. So, then, how much engagement is enough (and how much is too little)?
This depends to a large extent on the scope of the standard. It presently looks like stakeholder and developing country engagement levels will be lower than originally hoped. This must result in a reduction in the scope and ambition for the standard that is to be developed.
If Bangkok is to succeed we need a positive agenda; if the whole ISO social responsibility process is to succeed it also needs to be a modest one. The question is: where will this agenda come from? And then: what can be done to ensure that a minimum of participation is achieved?
Positive but modest agenda
Like it or not, the three-year-plus ISO social responsibility process is the biggest, most comprehensive and most inclusive social responsibility process that we have to work with at present – and, in all likelihood, that we will ever have to work with. Politicised though it is, the ISO Working Group on Social Responsibility is also the only international initiative focused on the implementation of existing rules rather than creation of additional ones.
Further, ISO standards are the most widely respected and used non-governmental standards. There are more than half a million sites certified to ISO9000 worldwide, and a further 66,000 certified to ISO14001. But that is just certifications – estimates suggest that up to ten times as many sites are using these standards as guidance documents. ISO26000 will not be for certification – but literally hundreds of thousands of organisations will hear about it and trust it.
The danger is that we let the numbers and potential impacts go to our heads. ISO is a consensus-based process in which nothing can be done unless all countries and stakeholders are happy with it. There are also a large number of very sharp, very plugged in experts involved in the process. So anyone hoping to slip something by unnoticed or to force someone’s hand should find another forum.
Given that most experts have more concerns than hopes, that participation rates will not be as high as originally hoped, that consensus rules, and that any international standard will ultimately be a lowest-common-denominator – what is the way forward? What is a realistic, positive agenda for the ISO social responsibility standard?
If ISO’s strength is its mainstream potential, then ISO should develop a mainstream standard – something that helps the masses of uninitiated, uninformed organisations to understand what the acronym means for them. Crucially, it must be something that the big business lobby can support – even if the only reason is that it explicitly does not target them. Call it what you want, the ISO social responsibility standard will be used primarily by corporate entities: it must be developed with this in mind.
For their part, unions and NGOs have been cynical about the benefits of social responsibility, and continue to campaign for better implementation of existing laws and new regulations. Like it or not, however, there appears to be limited appetite among governments to oblige either side. There are as few signs of moves to respond to business calls for more carrots as signs to oblige NGO calls for more sticks.
But imperfect though social responsibility is, governments, consumers, labour, NGOs and progressive companies all share an interest in injecting social responsibility DNA into large laggard companies and into small and medium sized enterprises. And these are the people whom ISO should want around the table: groups that are ambitious in the number of organisations that they want to help, not in the amount of pressure that they want to apply. ISO is not the right forum for applying pressure.
As a broad guidance standard, the 26000 series could be a major factor in giving profile and meaning to social responsibility issues for all organisations. There will still be plenty of room for disagreements in the negotiation of the text, but at least we will have a common vision for what we want to create. ISO should create the Dummies’ Guide to social responsibility.
Breakthrough or bust?
If a breakthrough comes at Bangkok, it will not be in the form of an agreed social responsibility standard. That is probably still years away. It will come with the greater recognition that: a social responsibility standard can be an opportunity, not just a threat; ISO’s open, multi-stakeholder, expert-based process offers the best framework to produce such a result; and even as a “lowest common denominator” standard, the prospect of scaling up social responsibility not to hundreds but to hundreds of thousands of organisations is worth a bit of everyone’s time and energy.
Paul Hohnen is an independent consultant advising on sustainability issues; Tom Rotherham works for the International Institute for Sustainable Development (IISD). Both have been actively involved in the ISO Social Responsibility process for the past two and a half years and will be attending the upcoming Bangkok meeting.
Thursday, July 21, 2005
Destined to be the CSR Book of the Year
The Financial Times carried a story about howGrupoNueva aims to target the world’s poor as apotential market by aiming to design and sellaffordable wood and water pipeline products to thisvast segment of the world’s population. The company,it said, was aiming to show how profitability and corporate responsibility can go hand in hand.The move is one of the first responses to thereasoning behind the recent book by C.K.Prahalad, ‘TheFortune at the Bottom of the Pyramid’.
Prahalad’s premise is that the intelligent application of marketscan create a real breakthrough in tackling global poverty. After all, he points out, for more than 50years the World Bank, donor nations, aid agencies,governments and others have taken what steps theycould – but have failed to eradicate poverty. It remains the world’s most visible and daunting problem. There has to be a better approach to alleviatepoverty. The innate potential of the poor to innovateand create enterprise needs to be unleashed. Companies should actively provide products and services whichmeet real needs affordably and profitably.This is not about community investment programmes.
With the best will in the world, global poverty willnot be solved by corporate philanthropy. It is about offering choices to the poor, building self-esteem andcreating a positive upward-spiral effect.There are some basic assumptions behind this approach.The first of these is that companies do most damage tothe poor if they ignore them and their needsaltogether. The benefits of globalisation won’t berealised so long as the poor have no access to them.The second is that there needs to be real innovationto serve such markets – products developed for wealthymarkets cannot simply be transferred to serve the‘bottom of the pyramid’ markets. Thirdly – this iscore business. A choice to focus in this area may bepart of a company’s approach to corporateresponsibility, but to be sustainable it needs to berun as any other part of a profitable business. It isnot about charity.Why have companies not rushed to embrace such conceptsin the past? Predominantly, because of certain beliefs about the nature of these markets that are highly opento challenge.One such belief is that there is no money amongst thepoorest communities. And yet the aggregate purchasing power in poor economies can be immense.
Economies of scale enter a new dimension when there are literallybillions of people involved. Using a figure based ondollar purchasing power parity, China is a $5 trillioneconomy, for instance.Another belief is that such markets are not brandconscious. In fact, the markets are very brandconscious, but they are also extremely valueconscious. Aspirational brands are as important forthese consumers as for many others.The logic of developing products for poor consumersis, however, a different one to the traditional. Thebasic economics is based on small unit packages, lowmargin per unit with high volume. Products need to bedesigned to work in areas where infrastructures may bepoor, and distribution mechanisms need to berethought.All well and good. But can it really work? At a recentBusiness in the Community event at the British Museum,Niall Fitzgerald gave several examples from the workof Unilever, which has been one of the most activecompanies in this area (the examples are also given inthe book). For instance, in India more than 70 millionchildren suffer from iodine deficiency. HindustanLever (HLL), a Unilever subsidiary, produced aninnovative process for treating salt which meant thatit would retain its added iodine content in spite ofthe harsh environmental conditions. It created aniodised salt which only released the chemical once thesalt had been eaten and not before. The venture hasproven to be both beneficial to health, and profitablefor the company.Another example is that of how Hindustan Lever addressed the soap market. Diarrhoea is a major causeof death, creating 2.2 million deaths annually. A significant difference to such figures can be madewith some basic improvements in hygiene practices,even to such a simple level as washing hands withsoap. Amongst children in developing countries,washing hands can reduce diarrhoea fatalities by 50percent. So HLL realised that health-based educationwas going to be key to the development of theirmarket.The company approached village schools to educatechildren on the causes of disease, using ultravioletdirt to show the difference between ‘clean-lookinghands’ washed in dirty water, and those washed withsoap. The children often became the most educated inthe family on hygiene, and so began educating theirparents. For a country where the population issignificantly not reached by electronic media, such aprocess was a powerful way to get messages out.There are many other aspects to how such markets canbe made to work. There has to be a revolutionaryapproach to the use of technology. Eco-efficiencyneeds to be highly advanced.
Distribution systems are completely different (HLL operates through 250,000individual entrepreneurs in villages).Julio Moura, GrupoNueva president told students at theLondon Business School that his company’s aim to reachto such markets represented ‘a new frontier’ forcorporate responsibility. It could well be that hisconviction in this area will be the first of many.Prahalad’s book could well turn out to be one of themost influential books of its time, and it is certainly required reading for anyone serious aboutthe role of business in society.
Monday, July 04, 2005
A Response To The Economist Article
A response to The Economist regarding the relationship between business and society.
Source; Ethical Corporation
We should be grateful to The Economist. The extensive diatribe published in their special survey of 22nd January - “The good company – A sceptical look at corporate social responsibility” – has issued an intellectual call to arms to those concerned about the failure of markets to produce responsible corporate behaviour.This is Ethical Corporation’s contribution to the debate, not a statement for the movement. We could never speak for this young and evolving field with the same self-assurance with which The Economist applies a strand of 18th century Enlightenment theory to the complex global issues of political economy being faced in the real world in our own time.
Clearing the decks
The debate is overdue. Fudging the intellectual basis for responsibility ensured The Economist did not have to stretch far to score points. A response must begin by slaying a sacred cow that they attacked at length: that there is a business case for corporate responsibility.Academic studies have indeed gone some distance towards indicating that good companies do better over the long-term by, for example, reducing transaction costs through higher trust, and that meeting stakeholder concerns through, for example, investing in renewable energy, does not necessarily represent a cost to shareholder value, particularly over the longer term. Recent research published in Business Ethics even claims to have found “absolute, definite proof that responsible companies perform better financially”.The business case analysis is amoral. True, stakeholder dialogue may drive innovation by revealing alternative courses of action. If a company justifies all actions by reference to the primacy of maximising shareholder value, a possible action might both meet stakeholder concerns and provide shareholders the greatest net present value of future cash flows. But it also might not. And where meeting stakeholder concerns comes into conflict with greatest shareholder value, this company is telling us that the shareholder will win every time. The business case cannot sustain an argument for conscience, but, as will be argued later, this does not mean that responsibility is solely dependant on the innate ethical motivation of individual decision-makers.The remainder of The Economist’s attack can be interrogated in three steps.
1. Business fulfils its role in society just by pursuing its own self-interest
The primary objective of business, states The Economist – the objective that serves the greatest public good – is maximising profits. Not so. The primary purpose of business is the efficient production and distribution of goods and services that society needs. The right to take profit from this social function demands justification.
Tell it to the hand
Self-interest makes capitalism work for the public good, an idea articulated, it is said, in Adam Smith’s metaphor of the invisible hand. But economics is concerned with efficient resource use, not social behaviour, and Smith knew that self-interest has to be pursued by people of conscience if public good was to be served. In Smith’s time, the dominant form of enterprise was the partnership, in which ownership and management were fused. When the spread of public limited companies separated ownership from management, managers lost the freedom to act with conscience. Social accountability disappeared.Remarkably, The Economist acknowledges the primacy of conscience, noting that sometimes the aims of business and rational self-interest will clash with ethics, “and when they do, those aims and interests must give way.” The Economist makes no attempt to integrate this assertion into their analysis of “borrowed virtue”, or of the need to focus on profit as the only measure of performance.
Meanwhile, back in the real world
The pricing mechanism, repeats The Economist, is the means by which markets ensure that resources are allocated efficiently to activities with social value. The value we attach to the environment, or the rights of stakeholders, will push up the cost of production to a point where as customers we are not prepared to pay it.This works, however, only if certain stringent conditions are met. Nobel Prize winning economist Joseph Stiglitz proved that where the market lacks perfect information or perfect competition – in other words always - the pursuit of self-interest may indeed be in conflict with the interests of shareholders and others touched by the corporation’s activities.The Economist acknowledges the real world problem of building “externalities” into the pricing mechanism. These public goods – including a clean environment, water for life, a stable climate, biodiversity, beautiful countryside – are often not priced at all into goods that consume those resources. The resource – often a resource without substitute - is consumed with impunity. Although, as The Economist argues, the challenge is to find ways to price in these externalities, in many cases this will remain a pipedream.
2. Problems of social justice and market failure are best solved by governments
Government exists to intervene through public spending, taxes, and regulation where necessary to achieve social justice, or to correct market failures. The Economist acknowledges, however, citing the example of global warming, that governments are sometimes loath to pressure for change.Government weakness is worse than they describe. Globalisation prompts governments everywhere to race for the bottom. The UK government’s recent climbdown on corruption rules relating to export credit guarantees is a case in point. Governments lack the political will to act against problems of social justice that transcend borders, even where those problems originate at least in part from within their borders. We lack the necessary global institutions to counteract this reluctance, and global businesses have the power to exploit it.
3. Unilateral corporate action cannot bridge the gap left by weak government
It is unethical, argues The Economist, for directors to act against the profit interests of the owners to whom they owe a fiduciary duty. Is ethics that simple?
Freedom of conscience
The law protects shareholders because they have lent money to the company, but they are not alone in lending resources. Loyal consumers reserve for a company a space in their minds; employees lend their commitment beyond the job description; communities extend their toleration – the licence to operate. Our anachronous legal conception of the company fails to acknowledge these participants in the enterprise. The Economist reminds us that not everything that is legal is ethical. This anachronism is a case in point.Ethical obligations to shareholders will, on occasion, conflict with ethical obligations to other parties with whom the business has relationships. In such cases, the ethical solution may well not fulfil the legal duty. Are company directors to be denied freedom of conscience?Go and work somewhere where your conscience is not offended, retorts The Economist. Yet no industry is free of ethical issues requiring a trade-off between the interests of shareholders and other stakeholders.
Making ethical trade-offs between divergent stakeholder interests amounts to making social policy. Who wants companies to make social policy in any event, sparks The Economist. Companies lack the competence and the democratic accountability.In many of the more hostile business climates in the developing world, however, it can be hard to find a government that places the interests of the electorate before their own self-interest. Business’ embeddedness in society may also make it well placed - indeed sometimes better placed than a developing world government that lacks resources or reach - to enter into the dialogues – mediated through civil society - that will unearth the right trade-offs. Such political skills are fast becoming core competencies of the new generation of business leaders.
The common thread running through these arguments is that being a corporation does not entitle a business to approach its social relations differently from any other element of society. The social responsibility of business is the same as that of everyone else. So what standard of behaviour does society expect? Moral philosophy yields a wealth of responses. In this diverse world, however, there is something attractive about the discourse approach to ethics – the idea that two parties, given certain safeguards, can negotiate between themselves how they will behave towards each another. By all means draw from the multitude of standards and norms as a way of informing the dialogue, but businesses and stakeholder groups are turning to negotiation in order to arrive at a tangible social contract – what Lord Browne termed “a bargain of mutuality” in his speech at the World Economic Forum in Davos – underpinning their relationship. If not by virtue of markets, however, and if not necessarily with the intervention of government, what will drive corporations to conduct themselves as society expects?
Are you feeling lucky?
Following the failure of communism and the shifts in political power wrought by globalisation, one could be forgiven for thinking that politics – questions of social governance - had simply become subsumed within economics. Clearly economics is not up to that task, and society has a way of self-regulating in order to deal with such failure. This is civil society – the organically evolving, collective consciousness that things are going wrong, that lends itself to the “regulation” of relationships between members of society and the institutions of economic power within their midst. The pressure for change builds within civil society, and finds vent in unpredictable ways. It could be legal action, a media campaign, NGO activism or the cry of the whistleblower, or substantial acts of civil disobedience. It may prompt government to change law or regulation. It may affect one company, a sector or business in general. Consequences can be retrospective and severe.The dynamics of this pressure are not of the market - even when they use market mechanisms such as boycotts to effect their aims – but political, and they cannot generally be accounted for by the market until after the fact. Shareholders should be concerned, but that does not mean that pressure can be weighed up in a business case analysis.The only strategy by which managers can ward off the unpredictable consequences of feeding this pressure is by addressing the cause consistently. That means embedding a culture that questions the firm’s impacts on other members of society, striving to gain empathy with those stakeholder concerns through dialogue, then agreeing any necessary trade-offs between stakeholder interests, including those of shareholders. It may also be necessary, contrary to The Economist’s position, to enter into sectoral agreements on standards of conduct, provided they are arrived at through broad multi-stakeholder processes.Given legal constructs of the company that deny the reality of business’ place in society, such actions might be considered a form of civil disobedience to the injustice of a law-embedded ethic that considers important only the interests of one party to a social relation.Strength to their elbow. If capitalism and ethics are in conflict, it is not its ethics that society will change.
Saturday, June 18, 2005
Hot Topic 4 - The ISO26000
I saw this coming but i just didnt think that it would come this fast;
The International Standards Organisation (ISO) had a meeting in Korea this June on the future development of the proposed CSR standard ISO 26000 .... at last – a standard to define best practice in CSR into a management system that can achieve consistency; its expected to be published in 2008.
I havent made a personal stand on this issue yet because i'm still at a stage of wondering whether this will lead to people meeting standards for the sake of doing it or if they will be doing them creatively and out of it being ethics.......hmmmmm really leaves me confused !
read the full article on http://www.iso.org/iso/en/info/Conferences/SRConference/home.htm and let me know what you think!
Tuesday, May 24, 2005
Hot Topic 3 - CSR & SME's
Thursday, May 05, 2005
Hot Topic 2 - Carbon Emissions Trading Scheme
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