Thursday, July 21, 2005
Destined to be the CSR Book of the Year
Profitable poverty alleviation creates a ‘newfrontier’ for corporate responsibilityThe 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
Bad arguments against the good company?
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.
Masquerading Machiavellis
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.
Citizen Inc.
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.
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.
Masquerading Machiavellis
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.
Citizen Inc.
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.
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