Sustainablog

This blog will cover some news items related to Sustainability: Corporate Social Responsibility, Stewardship, Environmental management, etc.

22.1.05

The Economist - Editorial and Survey on CSR

Be forewarned, the Economist has never been a fan of CSR. They make
several good points, but to my interpretation, their core arguments
support our team's approach to CSR, which we have dubbed Corporate Social
Performance (CSP)

The basic problem CSP is trying to solve is not to reinvent the basic
principles of capitalism, but rather improve the simplistic way in which
most companies practice it. CSP is about maximising long term
profitability for shareholders -- not over four quarters. In fact, CSP and
long term business planning go hand in hand. Here are some examples why.

Environmental considerations are important not because we will run out of
copper tomorrow, but rather because society is beginning to rein in
destructive resource exploitation (leaking cyanide into a nearby river as
a by product of extracting that copper, say), and governments are enacting
taxation and regulatory policy to enforce this social choice. Companies
that take care of the environment (by reducing their environmental
footprint) will be better prepared to deal with this evolving set of
policies, and see their competitiveness enhanced through this careful
planning.

CSP-related HR planning considerations (diversity is a good example) are
important not because laws require non discrimination... But rather
because in this rapidly globalising world, multinationals that understand
how to deal with marketplace diversity are better equipped to grow. In
addition, their internal creativity and ability to problem-solve will
receive a boost from the diversity of viewpoints within the corporation;
and they will be able to draw from a larger labour pool of vastly
qualified candidates, increasing their competitiveness.

Designing products and services for industrialising and third world
countries (see recent works by CK Prahalad) is not about social
engineering, but profits -- properly addressing this market means
voluntarily setting aside huge revenue potential. New business models,
processes and market approaches may be needed, but they are not charity --
they are an investment that can, and should, pay off to those who plan it
well.

And ethical behaviour on the part of the employees of company has many
benefits for shareholders -- not the least of which is allowing them to
retain what they have invested, without having unscrupulous employees
appropriate what is not theirs.

In all these cases (and there are many others that each of you can come up
with), it pays to go beyond what the law says you should do. It takes more
planning, more creativity, more effort, and sometimes, courage to go
against established (many times outdated and flawed) cultures and
practices.

None of this, I believe, is news to the author of the survey, who writes:
?From an ethical point of view, a lot of corporate social responsibility
is really just good management. Anything that advances the interest of a
company, the company should be doing anyway. There shouldn't be any
applause or special credit for this.? A few brief examples of "win win"
CSR are provided, but the author dismisses these as simple "good
management" -- but dimisses CSR as necessarily being against the interest
of the corporation.

There appears be good news for CSP and CSR out of all this. According to
the author, "The winners are the charities, non-government organisations
and other elements of what is called civil society that pushed for CSR in
the first place. ...[They] dressed the notion in its new CSR garb and
moved it much higher up the corporate agenda. In public-relations terms,
their victory is total." When week after week brings in new revaltions on
pharmaceutical firm research, corporate accounting practices, and sundry
other events of day to day corporate life, I find this assessment sorely
lacking.

- Jean-Francois

The survey follows. Enjoy it! Your comments are welcome. If there is
enough response, and with your permission, I'll send out some of your
return comments to the community.
=========================================================

Author interview
Jan 20th 2005
From Economist.com












A discussion with Clive Crook, Deputy Editor of The Economist
?From an ethical point of view, a lot of corporate social responsibility
is really just good management. Anything that advances the interest of a
company, the company should be doing anyway. There shouldn't be any
applause or special credit for this.?

http://www.economist.com/printedition/displaystory.cfm?story_id=3574392


The good company
Jan 20th 2005
From The Economist print edition


Companies today are exhorted to be ?socially responsible?. What, exactly,
does this mean?









IT WILL no longer do for a company to go quietly about its business,
telling no lies and breaking no laws, selling things that people want, and
making money. That is so passé. Today, all companies, but especially big
ones, are enjoined from every side to worry less about profits and be
socially responsible instead. Surprisingly, perhaps, these demands have
elicited a willing, not to say avid, response in enlightened boardrooms
everywhere. Companies at every opportunity now pay elaborate obeisance to
the principles of corporate social responsibility. They have CSR officers,
CSR consultants, CSR departments, and CSR initiatives coming out of their
ears. A good thing, too, you might think. About time. What kind of idiot
or curmudgeon would challenge the case for businesses to behave more
responsibly? Thank you for asking.

Cynics and believers
The practices that caring, progressive CEOs mention when speaking at
conferences on CSR come in all shapes and sizes. Treat your employees
well; encourage loyalty among your customers and suppliers; avoid
investing in ?unethical? industries, or in countries where workers are
paid low wages or denied decent benefits; take care to save energy and
recycle used envelopes; and so on. The range of such policies makes it
hazardous to generalise. Some of them advance the interests of
shareholders and of the wider world as well; others make everyone, except
the office bureaucrats paid to dream them up, worse off. Motives vary too.
Some CSR advocates are cynics: they pay lip service to the idea but are
chuckling quietly. Others are true believers, born-again champions of a
kinder, gentler capitalism (see our survey in this issue).
The one thing that all the nostrums of CSR have in common is that they are
based on a faulty?and dangerously faulty?analysis of the capitalist system
they are intended to redeem. Admittedly, CSR is now so well entrenched and
amply funded that to complain about it may be pointless. We are concerned
that it may even be a socially irresponsible use of scarce newsprint.
Nonetheless, if businessmen had a clearer understanding of the CSR mindset
and its defects, they would be better at their jobs and everybody else
would be more prosperous.
Simply put, advocates of CSR work from the premise that unadorned
capitalism fails to serve the public interest. The search for profit, they
argue, may be a regrettable necessity in the modern world, a sad fact of
life if there is to be any private enterprise. But the problem is that the
profits of private enterprise go exclusively to shareholders. What about
the public good? Only if corporations recognise their obligations to
society?to ?stakeholders? other than the owners of the business?will that
broader social interest be advanced. Often, governments can force such
obligations on companies, through taxes and regulation. But that does not
fully discharge the enlightened company's debt to society. For that, one
requires CSR.
This is wrong. The goal of a well-run company may be to make profits for
its shareholders, but merely in doing that?provided it faces competition
in its markets, behaves honestly and obeys the law?the company, without
even trying, is doing good works. Its employees willingly work for the
company in exchange for wages; the transaction makes them better off. Its
customers willingly pay for the company's products; the transaction makes
them better off also. All the while, for strictly selfish reasons,
well-run companies will strive for friendly long-term relations with
employees, suppliers and customers. There is no need for selfless
sacrifice when it comes to stakeholders. It goes with the territory.
Thus, the selfish pursuit of profit serves a social purpose. And this is
putting it mildly. The standard of living people in the West enjoy today
is due to little else but the selfish pursuit of profit. It is a point
that Adam Smith emphasised in ?The Wealth of Nations?: ?It is not from the
benevolence of the butcher, the brewer, or the baker, that we expect our
dinner, but from their regard to their own interest.? This is not the
fatal defect of capitalism, as CSR-advocates appear to believe; it is the
very reason capitalism works.
Maybe so, those advocates might reply, but perhaps the system would work
even better if there were a bit more benevolence in the boardroom and a
bit less self-interest. In some cases, that might be so, but in general
(as Smith also noted) one should be wary of businessmen proclaiming their
benevolence. A question to ask of all outbreaks of corporate goodness is,
who is paying? Following the Indian Ocean tsunami, many companies made
generous donations to charities helping the victims. There could be no
worthier cause?but keep in mind that, in the case of public companies, the
managers authorising those donations were giving other people's money, not
their own. Philanthropy at others' expense, even in a cause as good as
that one, is not quite the real thing.

Pernicious benevolence
Unfortunately, tainted charity is certainly not the worst CSR can do. For
instance, in the name of socially responsible conduct?also to deflect
embarrassing criticism from anti-trade NGOs and to curry favour with
ill-informed consumers?some multinational firms have proudly withdrawn
from investments in developing countries where labour practices fall far
short of western standards. This is a pernicious kind of benevolence. The
policy may in fact be profit-maximising, for the reasons just noted, but
as a rule it will harm the people it is supposedly intended to help: the
people in the poor countries concerned, who would have benefited either
from employment at higher-than-prevailing wages or from the knock-on
economic effects of inward investment.
All things considered, there is much to be said for leaving social and
economic policy to governments. They, at least, are accountable to voters.
Managers lack the time for such endeavours, or should do. Lately they have
found it a struggle even to discharge their obligations to shareholders,
the people who are paying their wages. If they want to make the world a
better place?a commendable aim, to be sure?let them concentrate for the
time being on that.

The good company
Jan 20th 2005
From The Economist print edition










The movement for corporate social responsibility has won the battle of
ideas. That is a pity, argues Clive Crook (interviewed here)
OVER the past ten years or so, corporate social responsibility (CSR) has
blossomed as an idea, if not as a coherent practical programme. CSR
commands the attention of executives everywhere?if their public statements
are to be believed?and especially that of the managers of multinational
companies headquartered in Europe or the United States. Today corporate
social responsibility, if it is nothing else, is the tribute that
capitalism everywhere pays to virtue.
It would be a challenge to find a recent annual report of any big
international company that justifies the firm's existence merely in terms
of profit, rather than ?service to the community?. Such reports often talk
proudly of efforts to improve society and safeguard the environment?by
restricting emissions of greenhouse gases from the staff kitchen, say, or
recycling office stationery?before turning hesitantly to less important
matters, such as profits. Big firms nowadays are called upon to be good
corporate citizens, and they all want to show that they are.
On the face of it, this marks a significant victory in the battle of
ideas. The winners are the charities, non-government organisations and
other elements of what is called civil society that pushed for CSR in the
first place. These well-intentioned groups certainly did not invent the
idea of good corporate citizenship, which goes back a long way. But they
dressed the notion in its new CSR garb and moved it much higher up the
corporate agenda.
In public-relations terms, their victory is total. In fact, their
opponents never turned up. Unopposed, the CSR movement has distilled a
widespread suspicion of capitalism into a set of demands for action. As
its champions would say, they have held companies to account, by
embarrassing the ones that especially offend against the principles of
CSR, and by mobilising public sentiment and an almost universally
sympathetic press against them. Intellectually, at least, the corporate
world has surrendered and gone over to the other side.
The signs of the victory are not just in the speeches of top executives or
the diligent reporting of CSR efforts in their published accounts.
Corporate social responsibility is now an industry in its own right, and a
flourishing profession as well. Consultancies have sprung up to advise
companies on how to do CSR, and how to let it be known that they are doing
it. The big auditing and general-practice consulting firms offer clients
CSR advice (while conspicuously striving to be exemplary corporate
citizens themselves).
Most multinationals now have a senior executive, often with a staff at his
disposal, explicitly charged with developing and co-ordinating the CSR
function. In some cases, these executives have been recruited from NGOs.
There are executive-education programmes in CSR, business-school chairs in
CSR, CSR professional organisations, CSR websites, CSR newsletters and
much, much more.
But what does it all amount to, really? The winners, oddly enough, are
disappointed. They are starting to suspect that they have been conned.
Civil-society advocates of CSR increasingly accuse firms of merely paying
lip-service to the idea of good corporate citizenship. Firms are still
mainly interested in making money, they note disapprovingly, whatever the
CEO may say in the annual report. When commercial interests and broader
social welfare collide, profit comes first. Judge firms and their CSR
efforts by what the companies do, charities such as Christian Aid (a CSR
pioneer) now insist, not by what they say?and prepare to be unimpressed.
By all means, judge companies by their actions. And, applying that sound
measure, CSR enthusiasts are bound to be disappointed. The 2004 Giving
List, published by Britain's Guardian newspaper, showed that the
charitable contributions of FTSE 100 companies (including gifts in kind,
staff time devoted to charitable causes and related management costs)
averaged just 0.97% of pre-tax profits. A few give more; many give almost
nothing (though every one of them records some sort of charitable
contribution). The total is not exactly startling. The figures for
American corporate philanthropy are bigger, but the numbers are unlikely
to impress many CSR advocates.
Still, you might say, CSR was always intended to be more about how
companies conduct themselves in relation to ?stakeholders? (such as
workers, consumers, the broader society in which firms operate and, as is
often argued, future generations) than about straightforward gifts to
charity. Seen that way, donations, large or small, are not the main thing.
Setting gifts aside, then, what about the many other CSR initiatives and
activities undertaken by big multinational companies? Many of these are
expressly intended to help profits as well as do good. It is unclear
whether this kind of CSR quite counts. Some regard it as ?win-win?, and
something to celebrate; others view it as a sham, the same old tainted
profit motive masquerading as altruism. And, even to the most innocent
observer, plenty of CSR policies smack of tokenism and political
correctness more than of a genuine concern to ?give back to the
community?, as the Giving List puts it. Is CSR then mostly for show?








It is hazardous to generalise, because CSR takes many different forms and
is driven by many different motives. But the short answer must be yes: for
most companies, CSR does not go very deep. There are many interesting
exceptions?companies that have modelled themselves in ways different from
the norm; quite often, particular practices that work well enough in
business terms to be genuinely embraced; charitable endeavours that happen
to be doing real good, and on a meaningful scale. But for most
conventionally organised public companies?which means almost all of the
big ones?CSR is little more than a cosmetic treatment. The human face that
CSR applies to capitalism goes on each morning, gets increasingly smeared
by day and washes off at night.
Under pressure, big multinationals ask their critics to judge them by CSR
criteria, and then, as the critics charge, mostly fail to follow through.
Their efforts may be enough to convince the public that what they see is
pretty, and in many cases this may be all they are ever intended to
achieve. But by and large CSR is at best a gloss on capitalism, not the
deep systemic reform that its champions deem desirable.
Does this give cause for concern? On the whole, no, for a simple reason.
Capitalism does not need the fundamental reform that many CSR advocates
wish for. If CSR really were altering the bones behind the face of
capitalism?sawing its jaws, removing its teeth and reducing its bite?that
would be bad: not just for the owners of capital, who collect the
company's profits, but, as this survey will argue, also for society at
large. Better that CSR be undertaken as a cosmetic exercise than as
serious surgery to fix what doesn't need fixing.

We are an equal-opportunity employer
But this is not the end of the matter. Particular CSR initiatives may do
good, or harm, or make no difference one way or the other, but it is
important to resist the success of the CSR idea?that is, the almost
universal acceptance of its premises and main lines of argument. Otherwise
bones may indeed begin to snap and CSR may encroach on corporate
decision-making in ways that seriously reduce welfare.
Private enterprise requires a supporting infrastructure of laws and
permissions, and more generally the consent of electorates, to pursue its
business goals, whatever they may be. This is something that CSR advocates
emphasise?they talk of a ?licence to operate??and they are quite right.
But the informed consent of electorates, and an appropriately designed
economic infrastructure, in turn require an understanding of how
capitalism best works to serve the public good. The thinking behind CSR
gives an account of this which is muddled and, in some important ways,
downright false.
There is another danger too: namely, that CSR will distract attention from
genuine problems of business ethics that do need to be addressed. These
are not in short supply. To say that CSR reflects a mistaken analysis of
how capitalism serves society is certainly not to say that managers can be
left to do as they please, nor to say that the behaviour of firms is
nobody's concern but their own. There is indeed such a thing as ?business
ethics?: managers need to be clear about that, and to comprehend what it
implies for their actions.
Also, private enterprise serves the public good only if certain stringent
conditions are met. As a result, getting the most out of capitalism
requires public intervention of various kinds, and a lot of it: taxes,
public spending, regulation in many different areas of business activity.
It also requires corporate executives to be accountable?but to the right
people and in the right way.
CSR cannot be a substitute for wise policies in these areas. In several
little-noticed respects, it is already a hindrance to them. If left
unchallenged, it could well become more so. To improve capitalism, you
first need to understand it. The thinking behind CSR does not meet that
test.

The union of concerned executives
Jan 20th 2005
From The Economist print edition










CSR as practised means many different things
ON THE face of it, questioning the efforts of companies to behave
responsibly is an odd thing to do?unless you are accusing them of faking
it, or of falling below some commonly agreed minimum standard. How could a
company ever behave too responsibly? The very term ?corporate social
responsibility? endorses the actions to which it is applied. No doubt that
is why companies fasten the label to a quite bewildering variety of
supposedly enlightened, progressive or charitable corporate actions.
At one end of the broad span of CSR lie corporate policies that any
well-run company ought to have in place anyway, policies that are called
for on any sensible view of business ethics or good management practice.
These include not lying to your employees, for instance, not paying
bribes, and looking farther ahead than the next few weeks. At the other
end of the range are the more ambitious and distinctive policies that
differentiate between leaders and laggards in the CSR race?large
expenditures of time and resources on charitable activities, for instance,
or binding commitments to ?ethical investment?, or spending on
environmental protection beyond what regulators demand.
In other words, at the mild end of the range are practices that do not
need any special CSR defence: they can perfectly well justify themselves
in simpler ways, either as meeting standards of ordinary decency (of which
more later), or as being necessary in any case if managers are to run a
successful business. The issue here is not whether the activities
themselves make sense, but whether they deserve to be dignified by the
term ?corporate social responsibility??that is, whether they deserve the
special praise which this label is intended to elicit.
At the strong end of the range, many activities do deserve a special
label: they go well beyond the requirements of ordinary decency or
business necessity, so the term CSR is serving a useful purpose. But can
the same be said of the policies?
At first sight that looks like a churlish question. What could possibly be
wrong with policies such as corporate charity or careful attention to the
demands of environmental protection and sustainable development? Sometimes
nothing, but it depends. Many individual acts of good corporate
citizenship do make sense in business terms, or as ways of advancing the
public good, or both. But others do not.
Sometimes CSR policies are motivated by genuine concern for the intended
beneficiaries, or by a conscientious belief that businesses must earn
their ?licence to operate?. There are some kindly CEOs out there, and some
with a troubled conscience. But there can be other motives for CSR too.
There are quite a few vain CEOs who enjoy the attention which CSR
leadership brings them, and many others who, having climbed their way to
the top, seem to find running a profitable company too small a test of
their talents. Yet whatever the variations, one thing is constant: the
weight given to specious arguments about what businesses must do to
justify their existence and pay their way in society.
Putting those arguments about the duties of business to one side for the
moment, setting motives aside as well and thinking only of results, one
might ask two questions of any act of supposedly enlightened corporate
citizenship. Does it improve the company's long-term profitability? And
does it advance the broader public good?

Two tests
Successful managers usually do both at once, of course: merely by running
a profitable company, they are likely to be advancing the public good as
well. This argument will be taken up in more detail below. Some of the
business practices that are often (perhaps misleadingly) labelled as CSR
do fall into this category: they raise profits and advance society's
well-being at the same time. Examples include establishing a reputation
for dealing honestly with employees, suppliers and customers. This is the
win-win kind of CSR?the sort that fails to impress much of civil society.
Perhaps it would be better to call it simply ?good management?.









Turning back to those two questions, however, note that there are three
other possible answers as well. These are mapped out in the table. Some
kinds of CSR reduce profits but raise social welfare (this is what civil
society likes best: call it ?borrowed virtue?, for reasons to be explained
in a moment). There is also CSR that raises profits but reduces social
welfare (?pernicious CSR?), and CSR that reduces both profits and welfare
(a polite name for which might be ?delusional CSR?). Consider some
examples.
To begin with, win-win, or ?good management?. There is a lot of it about.
Many executives in the CSR movement deserve credit for testing and drawing
attention to novel practices that can yield these good results. Their
ideas may not be applicable in all or even most companies, but their
success in particular cases is impressive.
One of the most enthusiastic and persuasive evangelists of win-win CSR is
Marc Benioff, head of salesforce.com, a strikingly successful
internet-based business-services company. In his book, ?Compassionate
Capitalism?, he explains, among other things, how good corporate
citizenship can be used to attract, retain and motivate the best workers.
His company encourages its staff to devote time, at the firm's expense, to
charitable works. In complementary ways, it also provides flexibility in
working hours and conditions. The character of the firm, as perceived by
its employees and its customers alike, is closely associated with this
commitment to good causes.
All this seems to pay. Mr Benioff argues that this draws the right kind of
people to the firm?team players, joiners, volunteers, generous and
committed colleagues with a sense of loyalty to the enterprise. This kind
of corporate philanthropy, which marries good works with a clever way of
sorting and motivating staff, is undoubtedly catching on.
When you press a CEO for details of a company's CSR policies, and for
their business rationale, you find that every firm believes that its CSR
actions fall in the win-win box. No chief executive wants to believe that
the firm's various services to the community might reduce social welfare,
and none seems willing to admit that his enlightened management practices
might reduce profits?what would the shareholders make of that? But those
other cells of the matrix are far from empty.
A clear instance of an action that reduces profits while (presumably)
improving social welfare is a straightforward cash donation to charity.
The donations featured in the Giving List fall into this category. Sums
donated in this way have soared recently in response to the Asian tsunami.
You might suppose that devoting profit to the public interest is CSR at
its best, or at any rate its noblest. The enlightened company is
surrendering some of its earnings to make the world a better place.

Philanthropy that isn't
As many CEOs point out, this is not to say that there are no business
benefits. Some executives think of their charitable donations?especially
gifts such as sponsoring high-profile sporting or artistic events?as a
kind of advertising. Others may feel that their companies, or their
industries (oil, tobacco, pharmaceuticals), have such a poor image with
the public at large that generous charitable donations are needed to
redress matters. But straightforward corporate philanthropy of this kind
is not woven into the way the firm manages its personnel, so the
commercial benefits are probably limited. Most cash donations out of
profits probably do represent a net loss of profits (even if the loss is
less than the gross outlay).
And what, you might ask, is wrong with that? What is wrong with a company
giving part of its profits to help the victims of the disaster in Asia,
for instance?a good cause if ever there was one?
Not so fast. Remember that corporate philanthropy is charity with other
people's money?which is not philanthropy at all. When a company gives some
of its profits away in a good cause, its managers are indulging their
charitable instincts not at their own expense but at the expense of the
firm's owners. That is a morally dubious transaction. When Robin Hood
stole from the rich to give to the poor, he was still stealing. He might
have been a good corporate citizen, but he was still a bandit?and less of
one, arguably, than the vicariously charitable CEO, who is spending money
taken not from strangers, but from people who have placed him in a
position of trust to safeguard their property. That is why the box in the
table containing ?corporate philanthropy? is marked (perhaps too politely)
?borrowed virtue?.
Note that the world's most spectacular philanthropists?think of the Bill &
Melinda Gates Foundation, with its endowment of $27 billion?are not
spending the profits of the companies they are associated with but their
own private wealth. That is the real thing, true philanthropy, and is
nothing but admirable, especially if the givers are taking care to ensure
the money is spent wisely, as the biggest private foundations now do.
Philanthropy financed out of the profits of publicly owned companies is a
quite different thing, ethically speaking. Shareholders might expect to be
allowed to spend their money on good causes of their own choosing, rather
than seeing the managers whose salaries they pay take that uplifting duty
upon themselves.








In the case of some public companies, it is true that there are mitigating
circumstances. Some companies have a tradition of generosity with
shareholders' money stretching many years back. Some, for instance, are
formerly private or demutualised enterprises which, on going public,
created charitable foundations and undertook to keep them financed. In
these cases, the shareholders knew what they were getting into when they
acquired stakes in the companies. Conceivably, these policies may even be
among the reasons why some shareholders acquired their stakes in the first
place. At any rate, such owners have little or no reason for complaint. As
for the rest, the majority, it might have been polite to ask.
Still judging acts by their effects, as opposed to motives and underlying
rationale, the most harmful kinds of CSR, however, are the ?pernicious?
and ?delusional? sorts?that is, policies and practices that actually
reduce social welfare. How can that happen? All too easily.
Most CSR, in fact, is probably delusional, meaning that it reduces both
profits and social welfare, even if the cost under both headings is
usually small. Almost all CSR has at least some cost, after all, even if
it is no more than a modest increase in the firm's bureaucratic overhead.
That cost subtracts from social welfare in its own right. So the kind of
CSR that merely goes through the motions, delivering no new resources to
worthy causes, giving the firm's workers or customers no good reason to
think more highly of it (perhaps the opposite), involves a net loss of
welfare.
Or consider the current enthusiasm for recycling. No doubt there are cases
where it makes good business sense to recycle. These fall under the ?good
management? heading: they increase profits and (mainly for that reason)
social welfare as well. But the point is that recycling is not free.
Effort and other resources must be expended on it. Waste must be
collected, transported and processed before it can re-enter the productive
process. The costs can be substantial. If those private costs exceed the
private savings, profits will suffer?and so, most likely, will social
welfare.
Advocates of recycling would say this is short-sighted and wrong, because
it ignores the need to conserve natural resources. Shortages of materials
(such as newsprint), and of the natural resources needed to produce them
(trees), are not reflected in the prices paid, they argue. So a private
calculation of costs and benefits will not suffice. Profit, which is
private benefit minus private cost, might rule out recycling, whereas a
broader social calculation of costs and benefits would show a different
balance. Since society has a collective interest in conserving resources,
an interest not reflected in the market prices of commodities, recycling
might very well reduce profit but at the same time increase welfare?and,
as with corporate philanthropy, that is what CSR is about.
The trouble is, the notion that the market prices of commodities fail to
reflect their scarcity is wrong. In commodity markets, prices reflect
scarcity just fine. The long-term global trend of falling commodity
prices, despite growth in the world economy, is not due to the failure of
markets to reflect diminishing supplies and impending shortages. Commodity
markets are for the most part efficient and forward-looking. Commodity
prices, measured over recent decades, have followed a downward trend
because innovation has brought about ever-rising productivity in the use
of those resources. In other words, supply has outstripped demand. Where,
unusually, it has not, prices have indeed gone up?providing the signal
that may make recycling in those cases commercially sensible.
By and large, the world is not running out of resources; where it is,
prices reflect that fact. As a result, the ordinary pursuit of profits is
an excellent guide to companies on whether to recycle. There is no need to
anoint recycling as a kind of moral standard of responsible behaviour. And
if doing so succeeds in deflecting companies from thinking hard about
their costs, actual social harm results. Use of materials is an area where
private and social benefits are typically well-aligned.
Consider, finally, the case of CSR that raises profits but lowers
welfare?pernicious CSR. Recognising the existence of this category is
especially important. Some economically literate bosses argue that if CSR
raises profits then it must by the same token raise social welfare. So
long as good corporate citizenship is good for the bottom line, they
assume, you can rest assured that it must be win-win, and good for society
as well. As a rule, this may be true. But there are some large exceptions.
Almost all CSR advocates are passionate about ?sustainable development?.
The idea is strongly endorsed by governments everywhere, by institutions
such as the World Bank and the United Nations, and indeed by anybody at
all with a desire to be thought well of. It has become an organising
principle for the whole CSR movement. Emphasis is laid on environmental
protection and on responsible behaviour towards workers and communities in
the developing countries. In order to advance those eminently worthy
goals, some companies have lately devised codes of practice, or have
adopted codes written by other organisations. The danger lies in the
detail of these policies.
To many advocates of CSR, and to virtually all of the NGOs that have given
the CSR movement its intellectual drive, responsible behaviour towards
workers in the developing countries goes far beyond giving them jobs at
market wages and complying with local laws and regulations on matters such
as health and safety. There is a debate in CSR circles about exactly how
much higher than this the standard of responsible conduct should be. Some
improvement on the minimal market standard is probably win-win in any
case, because rich-country multinationals operating in developing
countries typically want to hire from a big pool of keen applicants and to
find better-than-average workers. Rich-country multinationals do in fact
pay substantially higher wages and give substantially better benefits
(such as access to health care) than the local norm. But how much of an
improvement on this profit-seeking market standard does good corporate
citizenship require?
Some CSR advocates have aligned themselves with those in the NGO movement
who regard it as wrong?exploitative, or ?unfair??to hire workers in the
developing countries on any terms that are significantly less generous
than those granted to their rich-country workers. Companies under NGO
scrutiny have been dissuaded from investing in manufacturing operations in
developing countries such as India or Bangladesh, or have decided to end
such operations, faced with charges that they are employing ?sweatshop
labour?. As good corporate citizens, they say with arms twisted behind
their back, they no longer do that. Many development NGOs are pushing for
labour standards that would mandate this kind of ?best practice?, and want
these standards written into future trade agreements.
The evidence clearly shows that policies of this kind (especially if they
come to be required of all companies as part of future trade pacts) are
not in the interests of the workers they purport to help. Foreign direct
investment in the third world is known to be one of the best spurs to
economic development: just look at China. Even when the wages and other
terms offered to local workers are much less generous than those offered
to their western counterparts, they are typically much better than the
local economy can provide, which is why jobs with foreign multinationals
are nearly always in great demand in poor countries.
Attitudes that discourage such investment by making it less profitable, or
by exposing companies that have made such investments to ridicule or
censure, undoubtedly hold poor countries back. They also keep in poverty
the very workers who would otherwise have got those jobs. To withdraw from
such investments, as good corporate citizens are frequently enjoined to,
may well be profitable for the companies concerned because staying put
would impose heavy costs on their reputation. Capitulating to the
ill-judged demands of the NGOs may be rational, profit-seeking behaviour
on their part. But in this case, what is good for profits is bad for
welfare.
This danger is compounded when CSR leaders campaign for the introduction
of codes that impose such standards on all firms. This too may be fine for
profits, which is why so many companies have begun to endorse this policy.
It is a good idea for a business to hobble its competition if
possible?which is what mandatory labour standards of the sort demanded of
the WTO tend to do. How much better if grasping this commercial advantage
can be disguised as acting the good corporate citizen. But hobbling the
competition is bad for the public at large. Again, by depriving them of
investment, such perverted virtue especially harms the economic prospects
of developing countries.
All this underlines a broader worry. Companies do operate in a climate of
opinion. To be successful and profitable, they must take account of how
they are perceived. Big, successful businesses, which often find
themselves in the public view, strive constantly to improve and protect
their reputation. This is just as it should be: concern for the way they
are judged by customers, suppliers and the world at large is a useful
discipline. If it were absent, there would be no economic pressure on
companies to behave decently. If nobody is paying attention, why worry
about dealing honestly with people, or honouring a contract? This pressure
of outsiders' perceptions is an indispensable force. Without it, companies
in a private-enterprise system would be nasty, brutish and very
short-lived.

Need to know
However, it is important that this pressure should be well-informed, or at
least not utterly misguided. In particular, it needs to embody some basic
economic understanding. Unwarranted, misguided or contradictory public
demands on companies, especially if these demands emerge in due course as
government mandates, can affect decisions in such a way as to detach
profitable business conduct from the public good.
If the public decides to punish banks and other service companies that
move their call-centres offshore by withholding its custom, the
profit-seeking company will respond by ending the practice. Whether that
response advances the broader social good then depends on the
circumstances. If consumers reject outsourcing of this kind because it
provides a lower quality of service, fine: that is the market working as
it should. If the public rejects outsourcing because it falsely believes
that workers in foreign call-centres are being exploited, that is not
fine: that is the market, through popular misconception, getting it wrong.

In a way, this is to concede an important point to the advocates of CSR.
Capitalism does function on top of, and one way or another is moulded by,
prevailing popular opinion. As noted earlier, the conditions that must be
satisfied if capitalism is to serve the public good are not trivial. A
comprehending and supportive climate of opinion must be added to the list.
That is why the battle of ideas matters so much.
CSR comes in a wide variety of forms. Judged by results, it may be
win-win, borrowed virtue, delusional or pernicious. Judged by motives, it
may be done in good faith or bad faith, out of conviction, boredom or
vanity, by genuinely well-intentioned business leaders or by cynical
bosses looking to dupe their consumers. But invariably, and dangerously,
it is underpinned by mixed-up economics.

The world according to CSR
Jan 20th 2005
From The Economist print edition










Good corporate citizens believe that capitalism is wicked but redeemable
OVER the past century or so, and especially in the past 50 years, the
western industrial democracies have experienced what can only be described
as an economic miracle. Living standards and the quality of life have
risen at a pace, and to a level, that would have been impossible to
imagine in earlier times.
This improvement in people's lives, staggering by any historical standard,
is not measured solely in terms of material consumption?important though
it is, for instance, to have enough to eat, to keep warm in winter, to be
entertained and educated and to be able to travel. In addition to material
gains such as these, and to all the other blessings of western ?consumer
society?, broader measures of well-being have raced upward as well: infant
mortality has plummeted, life expectancy has soared, and the quality of
those extended years of life, in terms of freedom from chronic sickness
and pain, is better than earlier generations ever dreamed it could be.
All this has been bestowed not just on an elite, but on the broad mass of
people. In the West today the poor live better lives than all but the
nobility enjoyed throughout the course of modern history before
capitalism. Capitalism, plainly, has been the driving force behind this
unparalleled economic and social progress. Yet today it is suspected,
feared and deplored?and not just by the kind of energetic anti-capitalists
who now and then put bricks through the windows of McDonald's.
According even to middle-of-the-road popular opinion, capitalism is at
best a regrettable necessity, a useful monster that needs to be bound,
drugged and muzzled if it is not to go on the rampage. Stranger still,
this view seems to be shared by a good proportion of business leaders.
Capitalism, if guided by nothing but their own unchecked intentions, would
be wicked, destructive and exploitative, they apparently believe?bent on
raping the planet and intent on keeping the poor outside the capitalist
West in poverty.
In a much-discussed recent book, ?The Corporation: The Pathological
Pursuit of Profit and Power?, Joel Bakan, a law professor at the
University of British Columbia, lays bare the danger. His themes were
further developed and illustrated in a film of the same title, which was
also successful and well reviewed.
The corporation's legally defined mandate is to pursue relentlessly and
without exception its own economic self-interest, regardless of the
harmful consequences it might cause to others...Today, corporations govern
our lives. They determine what we eat, what we watch, what we wear, where
we work and what we do. We are inescapably surrounded by their culture,
iconography and ideology. And, like the church and the monarchy in other
times, they posture as infallible and omnipotent, glorifying themselves in
imposing buildings and elaborate displays. Increasingly, corporations
dictate the decisions of their supposed overseers in government and
control domains of society once firmly embedded in the public sphere.
Corporations now govern society, perhaps more than governments themselves
do; yet ironically it is their very power, much of which they have gained
through economic globalisation, that makes them vulnerable. As is true of
any ruling institution, the corporation now attracts mistrust, fear and
demands for accountability from an increasingly anxious public. Today's
corporate leaders understand, as did their predecessors, that work is
needed to regain and maintain the public's trust. And they, like their
predecessors, are seeking to soften the corporation's image by presenting
it as human, benevolent and socially responsible.
In Mr Bakan's view, CSR is mostly a fraud. Companies, after all, are in
?pathological pursuit of profit and power?. CSR is merely a means to those
ends, a way to ingratiate capitalism to a rightly suspecting public. The
book's jacket has blurbs of generous praise not just, as you might expect,
from Noam Chomsky but also from an investment-fund manager and a CEO, who
says it is holding up ?a mirror for [corporations] to see their
destructive selves as others see them?.
Many businessmen do seem to recognise themselves in that mirror. And
popular culture has the corporate psycho in plain view?which is
remarkable, given the corporation's suffocating grip on all thoughts and
deeds. What is the capitalist ethos according to Hollywood? ?Greed is
good,? as Gordon Gekko explained in ?Wall Street?. From ?RoboCop? (the
military-industrial complex) to ?Super Size Me? (fast-food tyrants) and
back again, the brave unequal war against corporate dominion is waged.
This paranoid fear of capitalism, shared by so many of its leading
practitioners, boils down to two main ideas. First, profit in its own
right has nothing to do with the public good. A company in pursuit of
profit is seeking a purely private gain. If the pursuit of profit is to
yield an advance in social welfare, then something else, acting with
deliberation and intelligence from outside the corporation, must
intervene. Second, in their mad pursuit of private gain, companies are
driven by the logic of their quest to place crippling burdens on society
and on the environment.
So far as society at large is concerned, in other words, the untrammelled
pursuit of profit yields nothing, but costs plenty. Unless it is checked
either by CSR or (as Mr Bakan would prefer, if only as a first step) by
double-strength government regulation, private enterprise makes losers of
everyone but itself.










Private profit, public interest
The perceived tension between private profit and public interest pervades
the CSR literature. Yet the idea is never examined. It is always regarded
as self-evident.
The top executives at Royal Dutch/Shell have lately been acting as CSR
thought-leaders?and they are CSR champions in other ways as well (through
the activities of the generously supported charitable activities of the
Shell Foundation, for instance). Shell has a lot of popular suspicion to
live down, following the scandal over its operations in Nigeria, for
instance, and the controversy surrounding its plans for the disposal of
the Brent Spar oil-drilling platform in the North Sea. Its senior
executives have done their best. In a leaflet explaining why the company
had embraced CSR, Sir Mark Moody-Stuart, who was chairman between 1998 and
2001, and before that managing director, wrote:
[M]y colleagues and I on the committee of managing directors are totally
committed to a business strategy that generates profits while contributing
to the well-being of the planet and its people.
That seems entirely unobjectionable, you might think: a commitment to
motherhood and apple pie. But the clear implication?and Sir Mark, to judge
by other speeches and articles, buys it wholesale?is that if Shell simply
made profits for its owners, that would in itself contribute nothing to
?the planet and its people?. From this it follows that if Shell is to
justify its activities to society at large, it has to do more than just
make money for its owners. Therein lies the case for CSR. But is the
premise actually true? True or false, it is never challenged.
One of the world's foremost CSR networks and organisations is the World
Business Council for Sustainable Development. Its membership is made up of
175 big multinationals, including Shell, alongside firms such as ABB, Dow
Chemical, Ford, General Motors, Procter & Gamble, Time Warner and so on.
One of the council's publications begins:
Although the rationale for the very existence of business at law and in
other respects is to generate acceptable returns for its shareholders and
investors, business and business leaders have, over the centuries, made
significant contributions to the societies of which they form part.
Why yes. If you compare people's lives in the West today with those of
people living, say, a century ago, or two centuries ago, it would be
right, if perhaps a little miserly, to concede that business has made some
?significant contributions?. But in the council's opinion these moderately
important benefits did not arise because businesses generated acceptable
returns for their owners; they arose despite that fact. Profit,
unfortunately, is necessary, as the council sadly notes: otherwise you
cannot have business, along with the possibility of those quite useful
contributions. But those contributions have to be separately willed. It is
simply not in the nature of business as such to contribute. That is an
add-on, a responsibility that business may choose to discharge or not
discharge, as it sees fit.
So, anti-capitalists believe this; angry law-school professors (whose own
significant contributions cannot be in doubt) believe it; and the leaders
of international big business believe it. For good measure, many
industrial-country governments, acting singly or in concert, believe it as
well. Britain is just one of many countries to have designated a minister
responsible for encouraging CSR initiatives. In 2001 the European
Commission published a consultative paper entitled, ?Promoting a European
Framework for Corporate Social Responsibility?. The aim is ?to launch a
wide debate on how the European Union could promote corporate social
responsibility at both the European and international level?. Values, it
says, ?need to be translated into action?.
Leading international institutions such as the World Bank, the United
Nations, the Organisation of Economic Co-operation and Development, and
indeed more or less any outfit of that sort you care to name, endorse the
view that profit serves an exclusively private interest, and that blind
pursuit of profit is therefore likely to prove socially harmful.
The United Nations is especially keen on CSR, as part of a broad new
approach to global governance. It continues to promote its ?Global
Compact?, launched at the World Economic Forum in 1999. This initiative
aims to draw together businesses and business organisations, NGOs, and UN
and other international agencies. The goal of this new ?tripartism??an
ongoing discussion among governments, companies and civil society (which
is how the UN refers to NGOs)?is to find ways to ?underpin the free and
open market system with stable and just societies?.
It is one thing to believe that profit-seeking serves no public interest
directly. It is another to believe that profit-seeking, unless tempered
and channelled by CSR or in some other way, actually works against the
public interest. This second idea, already noted, is an extension of the
first. And this is where ?sustainable development? comes in.
The concept of sustainable development puts flesh on the idea that
business left to its own devices is dangerous. Untamed profit-seeking, it
is argued, puts strain on the environment and exploits workers. At the
same time the goal of sustainable development points to a more concrete
agenda for CSR: while pursuing profit, enlightened companies should take
care to protect the environment and uphold the rights of workers (and
others) as well. Hence the ?triple bottom line? which thought-leaders on
CSR (including the United Nations and the European Commission) want
companies to monitor and report: don't just aim to make money, but protect
the environment and fight for social justice as well.

Unsustainable
One problem with the triple bottom line is quickly apparent. Measuring
profits is fairly straightforward; measuring environmental protection and
social justice is not. The difficulty is partly that there is no single
yardstick for measuring progress in those areas. How is any given success
for environmental action to be weighed against any given advance in social
justice?or, for that matter, against any given change in profits? And how
are the three to be traded off against each other? (CSR advocates who
emphasise sustainable development implicitly insist that there must be
such a trade-off, at least when it comes to weighing profit against either
of the other two.) Measuring profits?the good old single bottom
line?offers a pretty clear test of business success. The triple bottom
line does not.
The problem is not just that there is no one yardstick allowing the three
measures to be compared with each other. It is also that there is no
agreement on what progress on the environment, or progress in the social
sphere, actually mean?not, at least, if you are trying to be precise about
it. In other words, there are no yardsticks by which different aspects of
environmental protection can be compared even with each other, let alone
with other criteria. And the same goes for social justice.
One company reduces its emissions of greenhouse gases. One increases its
spending on recycling. Another provides free child-care facilities for its
workers. Another raises the wages of its lowest-paid workers. All of these
things cost money: suppose, for the sake of argument, that all four have
reduced profit by the same amount. Which company has done most to protect
the environment? Which has done most to advance social progress? Overall,
how far has each company improved its triple bottom line? Bearing in mind
the cost, can you even say that any of them have done so?
The great virtue of the single bottom line is that it holds managers to
account for something. The triple bottom line does not. It is not so much
a licence to operate as a licence to obfuscate.
CSR advocates could reply that this misses the point. The idea of the
triple bottom line is not that the three-dimensional performance of
business can ever be judged as precisely as its orthodox one-dimensional
performance. The triple bottom line is just shorthand for saying: take
other things into account, acknowledge that profit isn't everything, and
don't pursue profit relentlessly, as you would otherwise be inclined to,
even at the expense of damage to the environment and infringements of the
rights of workers and other stakeholders. You cannot be precise about
these things, but at least you can recognise the social and environmental
peril of too narrow a focus on profit.
That is a perfectly reasonable line of argument?or it would be, if a
narrow focus on profit really did endanger the environment, systematically
infringe the rights of workers and stakeholders, and in general fail to
serve the public interest. That is the world according to CSR, but is the
world really like that? The short answer is no. For a slightly longer
answer, read on.

Profit and the public good
Jan 20th 2005
From The Economist print edition










Companies that merely compete and prosper make society better off
ADAM SMITH, you might say, wrote the book on corporate social
responsibility. It is entitled, ?Wealth of Nations?.
Every individual necessarily labours to render the annual revenue of the
society as great as he can. He generally, indeed, neither intends to
promote the public interest, nor knows how much he is promoting it...he
intends only his own gain, and he is in this, as in many other cases, led
by an invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for the society that it was no part of it. By
pursuing his own interest he frequently promotes that of the society more
effectually than when he really intends to promote it. I have never known
much good done by those who affected to trade for the public good.
It is not from the benevolence of the butcher, the brewer, or the baker,
that we expect our dinner, but from their regard to their own interest. We
address ourselves, not to their humanity but to their self-love, and never
talk to them of our own necessities but of their advantages.
Smith did not worship selfishness. He regarded benevolence as admirable,
as a great virtue, and he saw the instinct for sympathy towards one's
fellow man as the foundation on which civilised conduct is built (he wrote
another book about this: ?The Theory of Moral Sentiments?). But his
greatest economic insight?and indeed the greatest single insight yielded
by the discipline of economics?was that benevolence was not in fact
necessary to advance the public interest, so long as people were free to
engage with each other in voluntary economic interaction. That is
fortunate, he pointed out, since benevolence is often in short supply.
Self-interest, on the other hand, is not.
If self-interest, guided as though by an invisible hand, inadvertently
serves the public good, then it is easy to see why society can prosper
even if people are not always driven by benevolence. It is because Smith
was right about self-interest and the public interest that communism
failed and capitalism worked.
Most advocates of CSR, especially those who run giant international
corporations, have probably read some economics in their time. Many of the
officials at the United Nations, World Bank and OECD who argue in favour
of CSR have advanced degrees in the subject from the best universities.
Yet they have apparently failed to grasp this most basic and necessary
insight of the entire discipline. Through the action of Smith's invisible
hand, the private search for profit does advance the public interest.
There is no need for thought-leaders in CSR armed with initiatives and
compacts to bring this about.
Smith was a genius because this harmony of private interest and public
interest is not at all obvious?and yet, at the same time, once it is
pointed out, the idea is instantly simple and plausible. This is
especially so if you think not about self-interested individuals but about
profit-seeking companies. The value that people attach to the goods and
services they buy from companies is shown by what they are willing to pay
for them. The costs of producing those goods and services are a measure of
what society has to surrender to consume those things. If what people pay
exceeds the cost, society has gained?and the company has turned a profit.
The bigger the gain for society, the bigger the profit. So profits are a
guide (by no means a perfect one, but a guide nonetheless) to the value
that companies create for society.
Does this mean that Gordon Gekko, the odious protagonist of the movie,
?Wall Street?, was right to say that ?greed is good?? No: greed and
self-interest are not the same thing, as Mr Gekko discovered in that
movie. Greed, in the ordinary meaning of the word, is not rational or
calculating. Freely indulged, it makes you fat and drives you into
bankruptcy. The kind of self-interest that advances the public good is
rational and enlightened. Rational, calculating self-interest makes a
person, or a firm, worry about its reputation for honesty and fair
dealing, for paying debts and honouring agreements. It looks beyond the
short term and plans ahead. It considers sacrifices today for the sake of
gains tomorrow, or five years from now. It makes good neighbours.
Morally, also, there is a world of difference between greed and
self-interest. The first, even if it were not self-defeating, would still
be a gross perversion of the second. Failing to see this distinction, and
thus concluding without further thought that private enterprise is
tainted, is a kind of ethical stupidity. Greed is ugly. There is nothing
ignoble, in contrast, about a calm and moderate desire to advance one's
own welfare, married (as it is in most people) to a sympathetic regard for
the well-being of others. And, as Smith pointed out, rational
self-interest also happens to make the world go round.

Faulty premise
The premise that CSR advocates never question is in fact wrong. It is an
error to suppose that profit-seeking, as such, fails to advance the public
good, and that special efforts to give something back to society are
needed to redeem it.
However, as already noted, profit succeeds as an indicator of value
creation, and as a signal that draws new investment to socially useful
purposes, only under certain circumstances. It cannot be taken for granted
that these conditions will always be satisfied.








One main requirement is that firms are in competition with each other. The
profits that a monopoly can extract from the economy are a measure of
market power, not social gain. And monopoly profits may not serve as an
effective signal for new investment if economic barriers of one kind or
another hamper competition by keeping new entrants off the monopolist's
turf.
Oddly enough, business leaders who voice their commitment to good
corporate citizenship rarely demand the removal of barriers to competition
in their industries?a measure that would almost invariably serve the
public interest. Manufacturers are far more likely to call for import
barriers to be raised against their foreign competitors than they are to
call for existing tariffs or other barriers to come down. Producers of all
manner of goods and services are more likely to call for the introduction
of licences and controls to protect their existing positions in their
markets than to demand that newcomers should be permitted and even
encouraged to contest those markets.
And CSR often helps them in this. Although it is true that many business
leaders mean what they say about good corporate citizenship, and speak up
for CSR in good faith, CSR is nonetheless far more often invoked as a
rationale for anti-competitive practices than as a reason to bolster
competition. Incumbent firms or professions seem to find it easier to
comply with burdensome regulations if they know that those rules are
deterring new entrants. That is why, often in the name of CSR, incumbent
businesses are so given to calling for rules and standards to be
harmonised and extended, both at home and abroad.
For the good of the public, you understand, barristers are opposed to
reforms that would allow solicitors to appear more often as advocates in
English courts (their training just isn't up to it). For the safety of the
consumer, American pharmaceutical companies insist, extraordinary
precautions must be taken before drugs can be imported from Canada (heaven
knows what the Canadians, a devil-may-care sort of people, put into those
pills). For the good of the world's poor, industrial-country manufacturers
believe, goods should not be imported from countries where employees have
to work long hours for low pay and without statutory vacations (that is
unfair trade).
A great deal of economic regulation makes sense for one reason or another.
But it is striking that business leaders?especially, it seems, those who
speak up most enthusiastically for CSR?call for regulation that restricts
competition far more often than they call for regulation that strengthens
it. This prompts the thought that the design of economic regulation is
best left to governments, rather than to corporate citizens, however
enlightened.

Social prices
A second condition must be met before one can be sure that private
enterprise in competitive markets is advancing the public good. Prices
need to reflect true social costs and benefits. Many transactions,
however, have side-effects?externalities, as they are called. Where they
do, private costs and benefits diverge from public costs and benefits.
Sometimes externalities are positive. If your neighbour repaints his
house, that may increase the value of yours; since he fails to capture all
the gains created by his spending, he may repaint his house less
frequently than would be best for society at large?or, in this case, for
your end of the street. Markets tend to undersupply goods that involve
positive externalities.
Externalities can also be negative. The classic instance is a polluting
factory. The owners of the factory and the customers for its goods do not
have to bear the full costs of the pollution that comes out of its
smokestacks. Failing to take that into account, the market sets the price
of the factory's goods too low. Demand for the product is stronger than it
should be. Goods that involve negative externalities tend to be
oversupplied.
This kind of argument is invoked to make sense of ?sustainable
development? and the claims pressed on business by that idea. Prices are
wrong, the argument goes, so markets are failing. Pollution, including the
accumulation of greenhouse gases, is not priced into the market, so there
is too much of it. Impending shortages of natural resources are not priced
into the market, so those resources are consumed too rapidly. The value of
wilderness, either for its beauty or for its stocks of endangered species,
is not priced into the market, so too much of it gets cemented over.
Whether the pattern of consumption based on these false prices is
sustainable is really beside the point. Some patterns of consumption could
be indefinitely sustained but still be wrong, causing mounting damage as
far ahead as one can see. Others might indeed be unsustainable, meaning
bound to be halted at some point, yet not be wrong, as when the
approaching exhaustion of a raw material leads to the invention of a
substitute. ?Sustainability? has a nice ring to it, but it is not the
issue. The question is whether false prices are causing big economic
mistakes?and, if so, what might be done about that.
Many market prices do diverge from the corresponding ?shadow prices? that
would direct resources to their socially best uses. In many cases, the
divergence is big enough to warrant government action?a point which all
governments have taken on board, sometimes to a fault. All
industrial-country governments intervene in their economies. In principle,
much of this intervention aims to mitigate the misallocation of resources
caused by externalities and other kinds of market failure. But it is
important to keep a sense of proportion about the supposed unreliability
of market signals.
So far as environmental externalities are concerned, most leading
advocates of CSR seem to be in the grip of a grossly exaggerated
environmental pessimism. The claim that economic growth is necessarily bad
for the environment is an article of faith in the CSR movement. But this
idea is simply wrong.
Natural resources are not running out, if you measure effective supply in
relation to demand. The reason is that scarcity raises prices, which spurs
innovation: new sources are found, the efficiency of extraction goes up,
existing supplies are used more economically, and substitutes are
invented. In 1970, global reserves of copper were estimated at 280m
tonnes; during the next 30 years about 270m tonnes were consumed. Where
did estimated reserves of copper stand at the turn of the century? Not at
10m tonnes, but at 340m. Available supplies have surged, and, it so
happens, demand per unit of economic activity has been falling: copper is
being replaced in many of its main industrial applications by other
materials (notably, fibre-optic cable instead of copper wire for
telecommunications).
Copper, therefore, is unlikely ever to run out?and if it did, in some very
distant future, it would be unlikely by then to matter. The same is true
for other key minerals. Reserves of bauxite in 1970 were 5.3 billion
tonnes; the amount consumed between 1970 and 2000 was around 3 billion
tonnes; reserves by the end of the century stood at 25 billion tonnes. Or
take energy. Oil reserves in 1970: 580 billion barrels. Oil consumed
between 1970 and the turn of the century: 690 billion barrels. Oil
reserves in 2000: 1,050 billion barrels. And so on.

The colour of gloom
What about pollution? On the whole, rich countries are less polluted than
poor countries, not more. The reason is that wealth increases both the
demand for a healthier environment and the means to bring it about.
Environmental regulation has been necessary to achieve this, to be sure,
because pollution is indeed an externality. But it is not true that the
problem has been left unattended in the rich world, that things are
therefore getting worse, and that CSR initiatives have to rise to the
challenge of dealing with this neglect.
Strong environmental protection is already in place in Europe and the
United States. In some cases, no doubt, it needs to be strengthened
further. In some other cases, most likely, it is already too strong.
Overall, the evidence fails to show systematic neglect, or any tendency,
once government regulation is taken into account, for economic growth to
make things worse.
How much of an exception to this is global warming? Potentially, as many
CSR advocates say, a very important one. Emissions of greenhouse gases are
causing stocks of carbon in the atmosphere to grow rapidly. Almost all
climate scientists expect this to raise temperatures to some unknown
extent during the coming decades. If temperatures rise towards the upper
end of current projections, the environmental damage will be great.
Yet the world still lacks an effective regime for global carbon abatement.
This is not so much because the United States has refused to support the
Kyoto agreement as because that agreement is deeply flawed in any case?but
this is beside the point. Global warming is a potentially very significant
externality that governments up to now have failed to address properly.
Another such case is excessive encroachment on wilderness areas. Once a
wilderness has been lost, it cannot be replaced?and, unlike for copper or
oil, there will never be a substitute. Governments in many rich and poor
countries are neglecting this issue.
But on questions such as these, where governments are, it seems, leaving
significant market failures unaddressed, the question for businesses is
whether CSR can do anything useful to bridge the gap. Many companies at
the forefront of the CSR movement have embarked on initiatives of their
own, aimed, for example, at reducing greenhouse-gas emissions or at
protecting wilderness areas.
These would need to be judged case by case, to see whether particular
policies were instances of ?good management? (as when an oil company
invests profitably in alternative fuels, anticipating both shifts in
consumer demand and forthcoming taxes on carbon), ?borrowed virtue?, (for
example, creating private wilderness reserves at shareholders' expense),
?pernicious CSR? (blocking competition in the name of specious
environmental goals) or ?delusional CSR? (increasing emissions of
greenhouse gases in order to conserve raw materials that are not in
diminishing supply).
There will be good and bad. As a general rule, however, correcting market
failures is best left to government. Businesses cannot be trusted to get
it right, partly because they lack the wherewithal to frame intelligent
policy in these areas. Aside from the implausibility of expecting the
unco-ordinated actions of thousands of private firms to yield a coherent
optimising policy on global warming, say, there is also what you might
call the constitutional issue. The right policy on global warming is not
clear-cut even at the global level, to say nothing of the national level
or the level of the individual firm or consumer. Devising such a policy,
and sharing the costs equitably, is a political challenge of the first
order. Settling such questions exceeds both the competence and the proper
remit of private enterprise.


The ethics of business
Jan 20th 2005
From The Economist print edition










Good corporate citizens, and wise governments, should be wary of CSR
RECALL that Joel Bakan, the angry law-school professor and scourge of
modern corporations, argued that CSR is usually a scam. It is for
governments, he says, not firms, to decide questions of social,
environmental and industrial policy?and governments should know that if
they fail in that duty, the psychotic corporation, quite likely hiding
behind CSR, will continue to rape and pillage.
Mr Bakan and those who share his morbid fear of capitalism are wrong about
that second point. Not only is competitive private enterprise already
heavily regulated; it also comes with a great deal of built-in additional
self-interested self-regulation, as it were. But they are quite right
about the first point. It is indeed desirable to establish a clear
division of duties between business and government. Governments, which are
accountable to their electorates, should decide matters of public policy.
Managers, who are accountable to their shareholders, should run their
businesses.
Does this mean that managers need not concern themselves with ethics? Just
the opposite. Managers should think much harder about business ethics than
they appear to at present. It is lack of clarity about business ethics
that gives rise to confusion over what managers' responsibilities are, and
over where the limits of those responsibilities lie.
The crucial point is that managers of public companies do not own the
businesses they run. They are employed by the firms' owners to maximise
the long-term value of the owners' assets. Putting those assets to any
other use is cheating the owners, and that is unethical. If a manager
believes that the business he is working for is causing harm to society at
large, the right thing to do is not to work for that business in the first
place. Nothing obliges someone who believes that the tobacco industry is
evil to work in that industry. But if someone accepts a salary to manage a
tobacco business in the interests of its owners, he has an obligation to
those owners. To flout that obligation is unethical.
In addition, of course, managers ought to behave ethically as they pursue
the proper business goal of maximising owner value?and that puts real
constraints on their actions. In most cases, acting within these
constraints advances the aim of the business, just as individuals find
that enlightened self-interest and ethical conduct usually sit well
together. But, for firms as for people, this will not always be true.
Sometimes the aims of the business and rational self-interest will clash
with ethics, and when they do, those aims and interests must give way.
Much the same goes for acting within the law. In democratic societies
where the rule of law is upheld, businesses and individuals should work
under a strong presumption that they will obey those societies' laws. This
will generally be good for business, and usually will be ethical as
well?but, again, not always. Now and then, depending on the circumstances,
it is wrong to obey the law. And merely following the law does not exhaust
a firm's ethical responsibilities, any more than it does an individual's.
Some things that are legal are unethical; and many things required by
ethics are not required by law.
Managers of companies must confront these questions in running their
businesses, just as individuals must in leading their everyday lives.
Business ethics, in short, is not an empty box. But what exactly is in the
box?
Elaine Sternberg, an academic philosopher and business consultant (and a
former investment banker), persuasively argues in her book, ?Just
Business?, that there are two main things: ?ordinary decency? and
?distributive justice?. These need to be understood in relation to the
proper goal of the firm. Without these basic values, business would not be
possible.

Be decent, be just
If owner value, and ownership itself, are to mean anything, there must be
respect for property rights. This excludes, Ms Sternberg points out,
?lying, cheating, stealing, killing, coercion, physical violence and most
illegality?; it calls instead for ?honesty and fairness?. Taken together,
in her formulation, these constraints reflect the demands of ?ordinary
decency?.
Some businessmen appear to believe that anything which is not outright
illegal, however unethical, can be regarded as proper business conduct.
But without ordinary decency (which goes a long way beyond what the law
requires of firms), business could not be carried on.
Firms that lie and cheat cannot expect to stay in business very long, even
if their actions are allowed by law. Dishonest companies will be unable to
borrow, to obtain working capital, or to form stable business
relationships with suppliers and customers. Decency in this sense is not
just good for business, it is essential. When it comes to maximising
long-term owner value, honesty is not just the best policy, it is the only
feasible policy.

Crime doesn't pay
What about organised crime, you might ask? The mafia lasted pretty well as
a profit-maximising business, did it not? Yes, but organised crime
nonetheless proves the point. See what a criminal or ?indecent? enterprise
has to do to grow and survive: it must corrupt and intimidate, and
thoroughly subvert both politics and the criminal-justice system. Some
sick jurisdictions have let that happen. Where the rule of law prevails,
however, those methods do not work outside a highly circumscribed and
perpetually beleaguered criminal domain. Inside this zone, enterprises are
small, always in hiding, and in pathological conflict with each other.
Outside it, in the light, honesty and fair dealing are required if
business enterprises are to prosper and survive.
Granted, some critics of business regard ?the big multinationals? as
little more than outposts of a mafia-like empire. In the world according
to Michael Moore, such companies do systematically lie and cheat, and get
away with it by corrupting and intimidating, and subverting both politics
and the criminal-justice system. There is indeed little to choose, on this
view, between Halliburton (or IBM, for that matter, or General Motors or
GlaxoSmithKline) and the cosa nostra. Now and then executives do commit
crimes, of course. Usually, they are found out and punished. That aside,
if you believe that ?the big multinationals? are essentially criminal
enterprises getting away with murder (perhaps literally), you are beyond
the reach of an article about business ethics.








What about the second component of business ethics, distributive justice?
In the business context, this simply means aligning benefits within the
organisation to the contribution made to achieving the aims of the firm.
Pay linked to performance and promotion on merit are instances of
distributive justice within the company.
Much of what was said about the role of ordinary decency applies here too.
Again, these notions of what is fair are widely accepted; on the other
hand, they are not, for the most part, required by law; as a practical
matter, they are needed if the business is to do as well as it can; and
they are also questions of ethics, and hence part of the ethics of
business. To promote a friend rather than the best person for the job, or
to reward a manager for incompetence or wrongdoing, is a bad way to run a
business?and is also unethical.
Many writers on business ethics, and just about all advocates of CSR,
argue that this way of thinking mistakes the proper purpose of the
enterprise. Making money for the owners is too narrow a view of what a
corporation is for. It raises ownership??mere ownership?, as they would
say?too high. Owners are just one group among many kinds of different
?stakeholders? in a business. It is wrong to run a business in the
interest of one kind of stakeholder, ignoring the legitimate interests of
all the others. Is this correct?
There is a lot of unnecessary confusion about ?stakeholders?. Businesses
certainly need to take account of other interested parties if they are to
succeed as businesses: they must satisfy their customers, get on with
their suppliers, motivate their workers, and so forth. In that sense,
these different groups of stakeholders will have their say and exercise
their influence. But ?taking account of? is not the same as ?being held
accountable to?. Accountability refers to a much more formal and direct
set of rights and obligations.
Of course it is always possible, as a matter of law, to create forms of
managerial accountability to non-owners. Through the courts, you might
say, managers are held accountable to society at large. Public policy can
make managers accountable to regulators. Managerial accountability to
workers can also be required by law: worker representation on company
boards is mandated in Germany, for instance. (Whether this serves the
interests of German workers, or of Germany's citizens in general, is
nowadays in doubt.) But all such lines of accountability recognise owners
as primary. You cannot deem stakeholders to be equal co-owners of a
business without repudiating the very idea of ownership. And where the law
does not create accountability to non-owners, there is none.
In many of the corporate scandals of recent years, it has seemed that
managers have acted as though they were accountable to nobody?not even,
and in some cases least of all, to the firms' owners. This has been
rightly recognised as a problem, and a lot of time and effort has been
spent on trying to make accountability to shareholders?on matters such as
executive pay?more effective.
Muddled thinking on CSR, and on supposed accountability to non-owners,
only makes it harder to put this right. Advocates of CSR ought to reflect
on the fact that the ?triple bottom line? and the bogus pay scheme which
rewards bad performance with riches have something important in common:
the idea that the interests of ?mere owners? should not be allowed to come
between managers and their personal objectives. Broken corporate
governance and CSR are close relations. You often see them together.

Good companies, good government
An earlier section of this article sketched out a four-way classification
of CSR: good management, borrowed virtue, pernicious CSR and delusional
CSR. Does business ethics shed any more light on those categories? It
does, though some of the results are a little troubling at first sight.
Good management and delusional CSR raise no new difficulties from an
ethical point of view: the first, which increases profits and improves
social welfare, is plainly a good thing and the second, which reduces
both, is plainly not. Borrowed virtue has already been criticised on
ethical grounds, even though it is assumed to advance social welfare. That
verdict stands, as you would expect. A proper understanding of business
ethics makes the reasoning clearer, but the main thing is still that the
profits of a publicly owned company are not the managers' to give away.
The remaining category is pernicious CSR, the kind that raises profits but
reduces social welfare.
Is pernicious CSR also unethical? Often, paradoxically, the answer will be
no. Managers cannot be criticised on ethical grounds for aiming to
increase long-term owner-value: that is their job. Assuming that they have
also acted within the law, the next question is whether they have violated
the standards of ordinary decency and distributive justice within the
organisation. If they have?if they have lied, or bribed, or coerced, for
instance?then they have behaved unethically. But if they have acted in
accordance with those two standards of business conduct, they are
ethically in the right, even though they have acted against the public
interest.









This is not as strange as it seems. Consider the case of monopoly.
Managers are not to be criticised on ethical grounds for striving to drive
their competitors out of business?provided that they do this by selling a
better product, for instance, rather than by deception or coercion or
through unlawful anti-competitive practices. And if they succeed in
establishing a monopoly, it is not unethical to set a price that maximises
the company's profits, or even (to the extent that the law allows it) to
create business barriers to the entry of new competitors (for instance, by
spending heavily on advertising). For that matter, it is not unethical for
a company to lobby the government for protection from foreign competition,
citing its concerns, as a good corporate citizen, for the well-being of
its workers. All of these things may well be ethical?even when, from the
point of view of society as a whole, they are likely to be undesirable.
This seeming paradox only underlines the point that businesses should not
try to do the work of governments, just as governments should not try to
do the work of businesses. The goals of business and the goals of
government are different?or should be. That, by the way, is why
?partnership? between those two should always arouse intense suspicion.
Managers, acting in their professional capacity, ought not to concern
themselves with the public good: they are not competent to do it, they
lack the democratic credentials for it, and their day jobs should leave
them no time even to think about it. If they merely concentrate on
discharging their responsibility to the owners of their firms, acting
ethically as they do so, they will usually serve the public good in any
case.
The proper guardians of the public interest are governments, which are
accountable to all citizens. It is the job of elected politicians to set
goals for regulators, to deal with externalities, to mediate among
different interests, to attend to the demands of social justice, to
provide public goods and collect the taxes to pay for them, to establish
collective priorities where that is necessary and appropriate, and to
organise resources accordingly.
The proper business of business is business. No apology required.

Carbon Dioxide Prices Crash as Chaos Hits Emissions Trading

Carbon Dioxide Prices Crash as Chaos Hits Emissions Trading
Independent on Sunday, 16 January 2005 - The price of carbon dioxide has
crashed after the first week of proper trading, as deepening uncertainty
over the emission trading scheme prompted traders to sell their holdings.
Prices ended the week almost 20 per cent down on the price on 1 January
when the initiative was launched.
Under the European Union scheme, aimed at reducing global warming,
companies are told how many tons of CO2 they can pump into the atmosphere
each year. If they exceed their allocation, they have to buy "carbon
credits" from under-polluting companies.
But analysts said that few companies participating in the programme had
bought any credits so far because five countries - including the UK - have
yet to finalise their plans and so cannot tell companies how much they can
pollute.
The uncertainty for UK participants increased last week when Brussels
rejected Britain's revised plan for the scheme. UK companies will not know
their individual allocation until the end of March at the earliest.
A tonne of CO2 exchanged for EUR6.88 when markets closed on Friday, down
from EUR13 at the start of last year in the "grey market".
Some 2 million tons of carbon have changed hands so far this year because
of traders' rush to sell. This compares to a total of 10 million tons of
trades in the two years before 1 January.
Veronica Smart, an analyst at Energy Information Centre consultancy, said:
"We saw a crash in prices the moment the scheme launched.
"If I were a UK participant I would not buy or sell anything when there is
so much uncertainty," she said. "In the UK, hardly any participating
companies have bought credits."
Low gas prices, which encourage electricity generators to use gas rather
than dirtier coal, were also pushing down carbon dioxide prices, she
added.


21.1.05

Three sectors to watch: Technologies that are helping nations jump ahead -- Water treatment, Transportation and Energy, Computing, communications

Three sectors to watch: Technologies that are helping nations jump ahead
The Toronto Star, 17 January 2005 - Every developed society or industrial
giant must confront a problem many of the world's poor or remote regions
don't need to worry about.
That problem is the obsolescence of industries, infrastructure and
business models.
Where is Toronto going to find the billions of dollars necessary to update
its sewer, water and transit systems? How is North America going to move
toward a hydrogen economy after becoming so dependent on fuelling
infrastructure for gasoline? Deteriorating legacy infrastructure keeps
so-called developed nations and corporate giants doing constant band-aid
maintenance. It takes resources away from the overhauls required to stay
competitive.
"They see the new technology coming and whap! They get blindsided by this
thing right in front of them," Craig Mundie, chief technical officer of
Microsoft Corp., once told me. "How does it always happen? Because they're
too focused on incrementally improving what they already do."
Politicians and business leaders, obsessed with short-term paybacks,
haven't the stomach to initiate massive change that will benefit future
generations.
This gives developing countries or underdeveloped regions, including
Canada's far north, an opportunity. New technologies - many developed in
richer nations, including Canada - combined with the lack of legacy
infrastructure are making it possible for parts of the world to jump past
developed markets now hamstrung by their own maturity. Among sectors where
such leapfrogging is beginning to occur:
Water treatment. Two weeks after the tsunami devastated South Asia,
Oakville-based Zenon Environmental Inc. teamed up with World Vision to
donate 54 of its Homespring water filtration units to areas of India and
Sri Lanka where there was a shortage of drinking water.
Zenon has sold many of its systems in the region, so the donation was a
good fit. "The product we sent doesn't require a lot of infrastructure,"
said Zenon spokesperson Nazeli Seferian. "You don't need to be hooked up
to a municipal system. It can be hooked up to a well and still produce
safe, clean water."
The systems are based on membrane technology. Long, thick and hollow
strands of plastic fibre move around in untreated water and suck up liquid
through billions of microscopic pores. Bacteria, viruses and other bad
stuff can't pass through the pores. The water that does get by is safe to
drink.
Homeowners can purchase the technology through Maytag, which struck a
partnership with Zenon. The units retail for about $4,000 and are attached
to the main water pipe coming into a building, house or cottage.
Seferian said small villages in India and Sri Lanka can connect these
units to wells shared by many people. Zenon plans to pursue more contracts
in these regions as economies develop.
"We're looking to work with other agencies in terms of helping countries
get the funding," she said.
Zenon's Homespring units are complemented by larger industrial and
municipal membrane-based systems. Among its contracts, the company is
helping China's capital, Beijing, and the City of Datong, treat wastewater
for industrial reuse.
Transportation and Energy. A developed transportation infrastructure
requires a network of roads, lights and fuel stations that, in some areas
of the world, simply don't exist. Not only are they expensive to build,
once they're set up it's very difficult to change them.
That's why parts of China and other areas of Asia are considered ideal
places to introduce hybrid and fuel cell cars, starting with city buses
and fleets. It would allow these regions to leapfrog North America's
gasoline-dependent transportation infrastructure and bypass the oil giants
that feed it. "One thing China has going for it is its relatively young
automotive industry," David Chen, vice-president for General Motors China,
told in November. "China's automotive industry does not need to fully take
the fossil fuel path. It is in an ideal position to develop alternative
energy."
But it's not just about fuelling infrastructure or technology under the
hood. Lighting, for example, is important transportation infrastructure.
But laying wiring needed to power traffic signals and road lights - even
lights for bus shelters - can be costly, particularly for countries the
size of China or India.
Carmanah Technologies of Victoria, B.C., mentioned in a Clean Break column
last November, gets around this by combining solar, battery and LED
technology. The result is a variety of lighting products that are
self-contained, last for five years or more without maintenance, and are
continually powered by sunlight, making them energy self-sufficient.
The great thing about such technology is it can be installed where and
when needed, growing as demand requires. This same principle applies to
fuel cells, solar photovoltaic systems and windmills, which can be set up
in remote areas to supply electricity. For example, a community windmill
or residential solar system can supply power directly - when the wind is
blowing or sun is shining - or energy can be stored as hydrogen for use in
a fuel cell system.
Distributed generation of renewable electricity is a growing trend as
developing countries look for pollution-free methods of powering their
growth.
Computing, communications. Wireless technologies have helped many
countries and rural regions get the same telecom and Internet access as
the most modern cities.
In Asia, more people surf the Web via mobile phones than North Americans
log on by computer. Places in Africa without phone service are dropping
radio towers into communities and tapping into nearby wireless systems or
satellites that provide voice and Internet services.
Canada's cottagers have reason to rejoice. In a few weeks, Telesat
Canada's Anik F2 satellite will begin providing broadband access to all of
North America and some parts of South America.
In the area of computing, having relatively immature infrastructure can
minimize the global reach of Microsoft Corp.'s monopoly grip. Linux and
open-source software are helping regions of Africa leapfrog into the
information age.
Last June, Linux Solutions, the International Institute of Communication
and Development and Uganda Martyrs University created the East African
Centre for Open Source Software.
The centre's goal is to train people in Burundi, Kenya, Rwanda, Tanzania
and Uganda on open source software, which because of its low cost is
ideally suited for cash-strapped regions of Africa.
In Spain's Extremadura region, home to some of the country's poorest
citizens, they have somehow managed to put more than 80,000 computers in
schools, loaded with a version of Linux. Officials there said they
couldn't have done it if Microsoft was the only choice.
Meanwhile, Russia, China and India are embracing Linux, partly because of
its affordability, but also because it allows them to control how it is
developed, thus creating local industries that can boost local economies.


NOT CLEANING UP YOUR ACT CAN BE COSTLY: After Enron, companies are awakening to the intrinsic value of maintaining a good name

NOT CLEANING UP YOUR ACT CAN BE COSTLY
September 2004
By Duncan Wood

After Enron, companies are awakening to the intrinsic value of maintaining
a good name
Once a year at the Memphis corporate headquarters of FedEx Corp.,
executives representing each of the company?s corporate-level departments
and operating units sit down together and assess the different risks the
company faces.
?We?ll consider plane crashes, computer outages, disruption at one of our
transport hubs, the loss of a package of national importance?we have
numerous issues that we evaluate and rank based on our vulnerability
assessments,? says Bill Margaritis, corporate vice president of worldwide
communications and investor relations with FedEx.
Meetings like these are fairly common across the corporate landscape, but
at FedEx there is a significant twist on business as usual. Besides
considering the financial impact of each event, the provisions for
business continuity and the effect on customer service as other companies
do, FedEx executives also ask what would happen to the company?s
reputation if any of these potential disasters occur. ?Reputation is a
strategic asset that needs to be managed in a highly disciplined and
focused manner on a sustained basis,? says Margaritis. ?We believe that a
strong reputation can act as a life preserver in a crisis and as a
tailwind when the company is on the offensive.? Academics agree and have
been arguing for years that reputation has a value and should be managed
like any other asset. But with a few exceptions, companies have tended to
pay little attention?that is, until now.
Today, discussions within Corporate America about how to protect
reputation are becoming, if not commonplace, then at least not
extraordinary. And the explanation for this new imperative should be
self-evident: Major companies have been collapsing under the weight of
reputations damaged by the actions of their top managements?or worse,
because of the behavior of top managements at other companies in their
industry.
Peter Sandman, a risk communication consultant based in Princeton, N.J.,
points to the impact that Enron?s collapse had on the energy sector. After
the energy giant suddenly sank in a sea of debt, the rest of the industry
was caught in the undertow?including some of Sandman?s own clients. ?The
assumption was that they were doing the same things as Enron,? Sandman
explains. ?They had trouble with their bondholders, their regulators and
the investing public?all of it attributable directly to Enron.?
To Sandman, the market?s loss of confidence in the energy sector was a
self-fulfilling prophecy. Investors turned tail and fled, and lenders
pulled in the credit lines, resulting in a downward spiral of ratings
downgrades and liquidity problems. Sandman suggests that, had one of these
companies tried at the beginning of the scandal to distinguish itself from
Enron, it may have been saved. ?But none took that strategy,? he says.
Nonetheless, the lessons of the millennial corporate governance scandals
are still fresh in the memory. The problem now is how one defines
reputation and then goes about protecting it.
Charles Fombrun, executive director of the Reputation Institute and a
former professor at New York University?s Stern School of Business,
defines reputation as ?the perception that stakeholders have of a company
as a whole. Different stakeholders have different expectations,? he says.
?If a company hits those expectations, then their reputation improves. If
it disappoints, the reputation suffers.?
It?s a simple definition, but using it as the basis for a management
response isn?t easy. The central problem: There can be a reputational
dimension to almost any action in which a company is involved?whether it?s
a missed earnings target, an offshoring decision, a product recall or the
escape of a pollutant from a company facility. ?Reputation touches every
function in an organization at every level. It also requires you to think
about all of the different stakeholder groups,? says Mark Bain, head of
corporate communications for Alticor Inc., the group that owns
direct-selling companies Amway and Quixtar. ?Often, you?ll find companies
doing things here and there to manage reputation, but very few do it
holistically.?
PUTTING A NUMBER ON IT
The stakes are high. The Reputation Institute?s Fombrun puts the consensus
estimate for the portion of a company?s value made up by its reputation at
20%, but claims some studies have suggested it could be as high as 90%.
This has prompted considerable work by academics and accountants to
provide a quantitative framework for evaluating intangible assets like
reputation, innovation and management expertise, which could allow
companies to attempt some risk transfer solution.
One group that stands to benefit from a more quantitative approach to
reputation is the insurance industry. Insurers have made numerous attempts
to develop cover specifically for reputational events, calling in
specialists in the field to help them measure the risks involved. For
instance, Sandman worked with a European insurer on its reputational
product initiative. For a while, he says, the insurer was ?very
interested? in adjusting its pricing policy to take reputational
management into account. ?It wasn?t reputational risk cover per se,? he
explains, ?but they knew that existing insurance was sensitive to the way
that reputational events were managed. When people are outraged, claims go
up, so they were considering reducing premiums for companies who could
demonstrate that they knew how to handle reputational issues.?
So far, however, the search for the quantitative analysis that would allow
real coverage has been largely fruitless?and Deborah Pretty, the New
York-based principal with consulting firm Oxford Metrica, believes that
?ultimately, reputation cannot be hedged, covered or transferred away.?
NO WAY BACK FROM HERE
Pretty should be in a position to judge, having previously advised one
large U.S. insurer on its attempt to create reputational cover. ?Even if
the insured client could be restored to exactly the same financial
position as before the loss?the principle of indemnity?such cover is
likely to be prohibitively expensive,? she says.
In the absence of readily available insurance solutions, says Pretty,
reputational risk ?remains on the CEO?s desk as a strategic asset that
requires active management and cannot be delegated to the treasury or
insurance department.?
So then the question becomes how to manage this unhedged risk. There?s no
single corporate function to take responsibility for oversight. Some
companies see it as an issue for communications, others as a problem of
brand management. Ethics officers and compliance officers are also in the
mix, as is investor relations.
At Alticor the communications function is actively involved in day-to-day
programs to build reputation, but representatives from all of the main
functions also sit on a ?global reputation team,? which is charged with
developing and monitoring worldwide plans to protect and enhance
reputation. The company is also willing to put its money where its mouth
is. Executives at Alticor know that the amount of money they take home at
the end of the year rests in part on their ability to meet their
reputational targets, says Bain. ?If you just reward people by sales or
profits, you may find that the actions of your employees are at odds with
the company?s reputational interests,? he notes.
A YARDSTICK FOR REPUTATION
Such a system has to be based on some kind of metric, of course, and both
Alticor and FedEx have developed formal processes to measure their
reputation. The principal tool is a regular survey of different
stakeholder groups.
On a quarterly basis, FedEx conducts a survey to find out how it is
perceived by external stakeholders, says Margaritis. It conducts another
survey of its own employees annually. Each of the surveys asks about a
consistent series of six attributes that the company believes are the key
drivers of corporate reputation, including quality of products, workplace
practices and social responsibility. ?We track the results to see where
we?re improving, whether our actions are improving our scorecard?and that
gives us a clear roadmap to take action when we need to enhance our
reputation,? he says.
The company has tried to establish a direct link between reputation and
shareholder value by studying the ways in which different elements of
reputation affect the behaviour of customers and investors. ?There are
correlations between changes in the reputational data and changes in the
?likely-to-buy? or ?likely-to-invest? results,? says Margaritis.
Alticor conducts a survey of the general public on an annual basis, and
does supplementary surveys of employees and salespeople every two years on
average. As with FedEx, the company explores more or less the same issues
in all of its surveys to enable comparisons across different stakeholder
groups, says Bain.
According to Sandman, however, monitoring and measuring reputation is only
half the battle?companies also need to understand how reputation can be
managed. As things stand, he says, ?company management is more aware of
reputational issues than they used to be, but their awareness of good
reputation management is as bad as ever.?
FedEx tries to improve its ability to manage reputation by regularly
running simulations in which cross-functional teams are given a scenario
and asked to react as though it was real. ?A call will come in, saying
that a plane has gone down with hazardous materials on board, or that
anthrax has been found in a transport hub?and you?ve got to mobilize, got
to move, got to manage,? says Margaritis.
As with the annual risk assessment meetings, reputation is a key
consideration in the FedEx simulations?and they will sometimes incorporate
elements designed specifically to test the team?s readiness to cope with a
specific reputational problem. ?We?ll have them react to a damaging issue
that goes public and attracts the attention of [nongovernmental
organizations] and pressure groups, or ask them how to respond to a
mocking CNN interview, or criticism from politicians,? he says. The team?s
behavior is evaluated throughout the simulation by a team of observers
using a variety of techniques.
It may seem like a lot of unnecessary hassle, but Margaritis believes that
pretending to cope with imagined disasters will not only help reduce the
reputational risks the company faces, but will also enable FedEx to cope
if something does go wrong. ?If more people understood the risk issues
connected to reputation,? he says, ?a lot of the corporate malfeasance
we?ve been through could have been avoided.?


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20.1.05

HBR: The Path to Corporate Responsibility

The Path to Corporate Responsibility
Simon Zadek
1 December 2004
Harvard Business Review

Nike's tagline, "Just do it," is an inspirational call to action for the
millions who wear the company's athletic gear. But in terms of corporate
responsibility, the company hasn't always followed its own advice. In the
1990s, protesters railed against sweatshop conditions at its overseas
suppliers and made Nike the global poster child for corporate ethical
fecklessness. Nike's every move was scrutinized, and every problem
discovered was touted as proof of the organization's irresponsibility and
greed. The real story, of course, is not so simple.
Nike's business modelâ?"to market high-end consumer products manufactured
in cost-efficient supply chainsâ?"is no different from that of thousands
of other companies. But the intense pressure that activists exerted on the
athletic giant forced it to take a long, hard look at corporate
responsibility faster than it might have otherwise. Since the 1990s, Nike
has traveled a bumpy road on this front, but it has ended up in a much
better place for its troubles. And the lessons it has learned will help
other companies traverse this same ground.
Over the past decade, I have worked with many global organizations,
including Nike, as they grappled with the complex challenges of
responsible business practices. This experience has shown me that while
every organization learns in unique ways, most pass through five
discernable stages in how they handle corporate responsibility. Moreover,
just as organizations' views of an issue grow and mature, so does
society's. Beyond getting their own houses in order, companies need to
stay abreast of the public's evolving ideas about corporate roles and
responsibilities. A company's journey through these two dimensions of
learningâ?"organizational and societalâ?"invariably leads it to engage
in what I call "civil learning." (To map this process for your
organization, see the sidebar "The Civil-Learning Tool.")
Organizational Learning
Organizations' learning pathways are complex and iterative. Companies can
make great strides in one area only to take a few steps backward when a
new demand is made of them. Nevertheless, as they move along the learning
curve, companies almost invariably go through the following five stages.
"It's not our job to fix that." In the defensive stage, the company is
faced with often unexpected criticism, usually from civil activists and
the media but sometimes from direct stakeholders such as customers,
employees, and investors. The company's responses are designed and
implemented by legal and communications teams and tend to involve either
outright rejections of allegations ("It didn't happen") or denials of the
links between the company's practices and the alleged negative outcomes
("It wasn't our fault"). Think of Royal Dutch/Shell's handling of the
controversy around carbon emissions. For years, the companyâ?"along with
the rest of the energy sectorâ?"denied its responsibility for emissions
created by the production and distribution of its energy products. Today,
Royal Dutch/Shell acknowledges some accountability. But unlike some of its
competitors, the company continues to resist environmentalists' demands
that it accept responsibility for emissions from its products after they
have been sold.
"We'll do just as much as we have to." At the compliance stage, it's clear
that a corporate policy must be established and observed, usually in ways
that can be made visible to critics ("We ensure that we don't do what we
agreed not to do"). Compliance is understood as a cost of doing business;
it creates value by protecting the company's reputation and reducing the
risk of litigation. Until recently, for example, much of the food industry
has understood "health" as the avoidance of legally unacceptable
"nonhealth." When NestlÃ(c) came under fire for the health dangers of its
infant formulaâ?"activists claimed that mothers in developing countries
would end up mixing the powder with contaminated water, thereby
compromising their children's healthâ?"its response for many years was to
shift its marketing policies to make this hazard clear to new mothers
rather than, for example, trying to educate them generally about ways to
ensure their babies' overall nutrition. The current public debate on
obesity highlights the same dynamicsâ?"food companies' instinct is to
simply aim for compliance, while the public clearly wants a far greater
commitment from them.
"It's the business, stupid." At the managerial stage, the company realizes
that it's facing a long-term problem that cannot be swatted away with
attempts at compliance or a public relations strategy. The company will
have to give managers of the core business responsibility for the problem
and its solution. Nike and other leading companies in the apparel and
footwear industries increasingly understand that compliance with
agreed-upon labor standards in their global supply chains is difficult if
not impossible without changes to how they set procurement incentives,
forecast sales, and manage inventory.
"It gives us a competitive edge." A company at the strategic stage learns
how realigning its strategy to address responsible business practices can
give it a leg up on the competition and contribute to the organization's
long-term success. Automobile companies know that their future depends on
their ability to develop environmentally safer forms of mobility. Food
companies are struggling to develop a different consciousness about how
their products affect their customers' health. And pharmaceutical
companies are exploring how to integrate health maintenance into their
business models alongside their traditional focus on treating illnesses.
"We need to make sure everybody does it." In the final civil stage,
companies promote collective action to address society's concerns.
Sometimes this is linked directly to strategy. For instance, Diageo and
other top alcohol companies know that as sure as night follows day,
restrictive legislation will come unless they can drive the whole sector
toward responsible practices that extend well beyond fair marketing. Among
other activities, these companies have been involved in educational
initiatives that promote responsible drinking. Likewise, energy companies
understand that their industry has to grapple with the sometimes unethical
ways in which governments use the windfall royalties they earn from oil
and gas extraction. So they are supporting the UK's Extractive Industries
Transparency Initiative, which urges governments to report the aggregate
revenues they derive from resource extraction. Some organizations look
even further ahead and think about metastrategy: the future role of
business in society and the stability and openness of global society
itself.
Societal Learning
A generation ago, most people didn't think tobacco was a dangerous health
threat. Just a few years ago, obesity was seen as a combination of
genetics and unhealthy lifestyle choicesâ?"certainly not the
responsibility of food companies. Today, ageism is rarely seen as a
corporate responsibility issue beyond compliance with the lawâ?"but in an
era of dramatic demographic shifts, it soon will be.
The trick, then, is for companies to be able to predict and credibly
respond to society's changing awareness of particular issues. The task is
daunting, given the complexity of the issues as well as stakeholders'
volatile and sometimes underinformed expectations about business'
capacities and responsibilities to address societal problems. Many civil
advocates, for instance, believe pharmaceutical companies should sell
lifesaving drugs to the poor at reduced prices; after all, the drug
companies can afford it more than the patients can. The pharmaceutical
industry has claimed over the years that such price limits would choke off
its research and development efforts. But today, drug companies are
exploring how to sustain R&D while pursuing price reductions in developing
countries and how to integrate the prevention of illness into their
business models.
Danish pharmaceutical company Novo Nordisk has created a practical tool to
track societal learning on some of its core business issuesâ?"animal
testing, genetically modified organisms, and access to drugs. The
drugmaker's approach can be adapted and used by any company facing any
number of issues. (See the exhibit "The Four Stages of Issue Maturity.")
In the early stages, issues tend to be vague and their potential
significance well below conventional thresholds used by the financial
community to determine materiality. These issues are often first
identified through a company's interactions with nontraditional sources of
knowledge, such as social activists. As one senior business manager
explains, when he deals with nongovernmental organizations, "I see the
future of our markets, our products, and this business."
As issues mature, they become absorbed into mainstream professional debate
and eventually into practice. Once leading companies adopt unconventional
commitments and practices around certain societal issues, laggards must
either follow suit or risk the consequences. In 1991, when Levi Strauss
publicly launched its "terms of engagement"â?"which defined the labor
standards for Levi's business partners and was one of the world's first
corporate-conduct policiesâ?"every other company in its industry looked
the other way, arguing that labor standards in other people's factories
weren't their responsibility. When the Body Shop adopted human rights
policies in the mid-1990s, most mainstream companies deemed its practices
unfeasible. And when BP CEO Sir John Browne acknowledged in his infamous
Stanford Business School speech that BP had a co-responsibility to address
the challenges associated with global warming, he was taking a leadership
role and betting that others would have to followâ?"as indeed they did.
Each of these actions played a big part in dragging the rest of the
players in the industry toward common approaches to responsible business
practices.
How Nike Just Did It
Nike's story illuminates better than most the tensions inherent in
managing corporate performance and societal expectations. In the 1990s,
the company was blindsided when activists launched an all-out campaign
against it because of worker conditions in its supply chain. There's no
doubt that Nike managed to make some extraordinary errors. But it also
learned some important lessons. Today, the company is participating in,
facilitating, convening, and financing initiatives to improve worker
conditions in global supply chains and promote corporate responsibility
more generally.
From Denial to Compliance. Nike's business model is based exclusively on
global outsourcing. Simply put, the company has rarely produced a shoe or
a T-shirt outside of its design studio. By the time the company was
singled out in a 1992 Harper's Magazine article for the appalling working
conditions in some of its suppliers' factories, almost all of its
competitors were using a similar sourcing model. Labor activists in the
early 1990s were exerting enormous pressure on premium-brand companies to
adopt codes of conduct in their global supply chains. These groups
targeted Nike because of its high-profile brand, not because its business
practices were any worse than its competitors'.
The company's first reaction was defensive. "We said, 'Wait a minute;
we've got the best corporate values in the world, so why aren't you
yelling at the other folks?'" one of Nike's senior managers recalls. "That
was a stupid thing to do. It didn't get us anywhere. If anything, it
raised the volume higher." The company realized it couldn't just shut out
the noise. It eventually responded to activists' demands for labor codes
and, after further pressure, agreed to external audits to verify whether
these codes were being enforced.
Nike hired high-profile firms or individuals to conduct the audits, which
were initially one-off events. But these companies and individuals had
little actual auditing experience or credibility in labor circles, and the
approach backfired. Statements such as former UN Ambassador Andrew Young's
casual conclusions that all was well in Nike's supply chains were publicly
challenged and subsequently proved to be flawed or overly simplistic.
Consequently, many labor activists believed Nike's early, failed attempts
at building credibility were proof of insincerity.
Companies frequently resist accepting new responsibilities because they
see how risk-taking organizations are criticized for their efforts to do
just that. But the pressure on Nike was so intense that it couldn't afford
to wait until the whole sector advanced. Labor activists' demands for
action were cascading into Nike's core and highly profitable youth markets
in North America and Europe. So in 1996, Nike "went professional" in
creating its first department specifically responsible for managing its
supply chain partners' compliance with labor standards. And in 1998, Nike
established a Corporate Responsibility department, acknowledging that
acting responsibly was far more than just reaching compliance; it was an
aspect of the business that had to be managed like any other.
Managing Responsibility. By the turn of the millennium, Nike's
labor-compliance team was more than 80 strong. The company had also hired
costly external professionals to audit its roughly 900 suppliers. Even so,
new revelations about Nike's failure to adhere to its own labor codes
constantly came to light. Many outsiders took this as proof that the
company still lacked any real commitment to address labor standards. Those
inside Nike's walls were incredibly frustrated by their failure to move
past this ongoing crisis. After a particularly painful documentary on Nike
aired in the United Kingdom, the CEO assembled a team of senior managers
and outsiders led by Nike's vice president for corporate responsibility,
Maria Eitel. The team was instructed to leave no stone unturned in
figuring out how to get beyond the company's continued failure to
effectively comply with its own labor codes.
The team's review didn't focus on the behaviors of factory managers and
workers, as many previous studies did; the group considered issues at the
factory level symptoms of a larger systemic problem. Instead of looking
down the supply chain, the team studied the upstream drivers. After six
months, it concluded that the root of the problem was not so much the
quality of the company's programs to improve worker conditions as Nike's
(and the industry's) approach to doing business.
Like its competitors, Nike offered performance incentives to its
procurement teams based on price, quality, and delivery times. This
standard industry practice undermined Nike's many positive efforts to
comply with its own codes of conduct; it had the unintended effect of
actively encouraging its buyers to circumvent code compliance to hit
targets and secure bonuses. And there were other tensions between Nike's
short-term financial goals and its longer-term strategic need to protect
the brand. For instance, the company's tight inventory management often
led to shortages when forecasting errors were made. That created urgent
short-term needs for more goods to satisfy market demand, which drove
procurement teams to take what they could get. Often, this would force
suppliers to cut corners to push the envelope on delivery times, which
would drive up overtime in the factoriesâ?"exactly what Nike's labor code
was trying to prevent. To cap it all, when something went wrong and Nike's
reputation took a hit, the procurement, marketing, and inventory
management teams weren't the ones that suffered financially. The brand
shouldered the burden, and the legal and other costs were charged to the
corporate center, not to those whose behavior had caused the problem in
the first place.
Nike realized that it had to manage corporate responsibility as a core
part of the business. Technically, it was relatively easy to reengineer
procurement incentives. The review team proposed that Nike grade all
factories according to their labor conditions and then tax or reward
procurement teams based on the grade of the supplier they used. But
commercially and culturally, it wasn't so simple. Nike's entrepreneurial
culture extended from brand management to procurement. Any challenge to
that spirit was considered by many as an affront to a business model that
had delivered almost continual financial success for three decades.
Nike's resistance to shifting its procurement methods cannot be dismissed
as some irrational distaste for change. It knew that constraining its
procurement teams would involve real costs and commercial risks. And the
hard reality was that Nike's efforts to secure adequate worker conditions
delivered little to the financial bottom line in the short termâ?"which
was the sole focus for the bulk of the company's mainstream investors.
(For more on the business implications of doing good, see the sidebar
"Being Good Doesn't Always Pay.") Nike's challenge was to adjust its
business model to embrace responsible practicesâ?"effectively building
tomorrow's business success without compromising today's bottom line. And
to do this, it had to offset any first-mover disadvantage by getting both
its competitors and suppliers involved.
It has turned out to be a long and rocky path for Nike and other companies
working to get the labor piece right. Several multistakeholder initiatives
were launched that focused on the development of credible and technically
robust approaches to compliance. Most well-known in the United States are
the Fair Labor Association (FLA), which was initially established with
support from the Clinton administration as the Apparel Industry
Partnership, and the SA8000 standard, which evolved with help from parties
outside the United States. The multistakeholder Ethical Trading Initiative
(ETI) emerged from the United Kingdom. Each initiative has distinct
characteristics, involves diverse companies, and associates with different
NGOs, labor organizations, and public bodies. But all have broadly
responded to the same need to develop, monitor, and comply with now
commonly accepted labor standards underpinned by UN conventions.
Responsible Business Strategies. Nike's underlying business strategy
wasn't static as it moved up the corporate responsibility learning curve.
The prevailing trade agreement in the apparel industry, the Multifiber
Arrangement (MFA), was nearing its end. The MFA had established
country-based garment import quotas to the all-important U.S. market. The
growth of Nike's apparel supply chains during the 1990s was partly driven
by cost grazingâ?"the ongoing search for lower prices. But the MFA had
reinforced that need to graze because companies had to search the world
for spare quota. The MFA also inhibited businesses like Nike from making
longer-term procurement commitments to their suppliers and thwarted the
stable conditions needed to advance opportunities for brands to invest in
technological and managerial progress.
The MFA's expiration on January 1, 2005, will accelerate the consolidation
of supply chains. With disperse supplier relationships and no quotas to
destabilize, experts argue, the scene is set for changes in the apparel
industry that will be as significant as the advent of globalized supply
chains themselves, which was a major factor in Nike's original success.
It's not just that there will be fewer and larger suppliers. Intensified
competition is pushing apparel makers to shorten the time between design
and market even as they continue to cut costs. The industry will probably
move to some form of lean manufacturingâ?"shifting away from traditional
top-down managerial styles toward greater worker self-management that
delivers more flexibility and productivity. Some estimates suggest
possible manufacturer cost savings of up to 25%.
In terms of worker conditions, the move toward lean manufacturing could
reduce the total number of people employed, especially if fewer, more
stable supply chains lead to advanced production technologies. But the
shift could also improve conditions for the remaining workers over time.
Because lean manufacturing requires employees to learn new skills, it
would put upward pressure on wages and improve management's behavior
toward workers. Clearly, Nike and its competitors will soon have new
opportunities to create value and new ways to align those opportunities
with responsible business practices. The challenge is to manage the
transition to a post-MFA world in a responsible fashion.
Nike's 2004 acquisition of the athletic apparel and footwear brand Starter
also affects Nike's strategy in terms of corporate responsibility. Starter
is sold at large retailers such as Wal-Mart, Kmart, and Target, and the
acquisition is a key element of Nike's growth strategy as the company
reaches the limits of organic growth in some of its core markets. Now that
it has entered the world of value-channel economics, Nike must concern
itself with high product volumes and low margins while also maintaining
its commitment to its labor codes.
Although it is a king-size operator in the market for premium goods, Nike
has far less leverage in the market for value items, in which it must deal
with retailers like notorious cost-squeezer Wal-Mart. Furthermore, value
customers focus on price and are generally less responsive to ethical
propositionsâ?"particularly those involving faraway problems like worker
conditions in Asia or Latin America. Nike's public position on these
issues is clear: It is committed to maintaining its labor compliance
standards in all product lines and in all supply chains. But the business
model underlying value-channel economics requires that Nike find new ways
to keep its social commitments. Part of Nike's response to this challenge
has been to argue for regulated international labor standards, which would
offset any possible competitive disadvantage that Nike would incur if it
had to go it alone.
Collective responsibility simply makes sense. After the acquisition of
Starter, Nike sent out letters to stakeholders explaining its approach:
"Whatever the channel where Nike products are sold, we have a growing
conviction that it is essential to work with others to move toward the
adoption of a common approach to labor compliance codes, monitoring, and
reporting to help ensure broader accountability across the whole industry.
This will take time, but through these efforts and with the active
participation of all the major players, we believe we can further
contribute to the evolution of supply chain practices, including in the
value channel." Nike recognized that its long-term success required it to
expand its focus from its own practices to those of the entire sector.
Toward Civil Action. Nike has been involved in various initiatives
designed to bridge corporate responsibility and public policy, starting
with the FLA in 1998. In July 2000, CEO Phil Knight attended the launch of
the Global Compact, UN Secretary-General Kofi Annan's multistakeholder
initiative designed to encourage responsible business practices. Knight
was one of the 50 or so chief executives of companies, NGOs, and labor
organizations from around the world who were at the event. He was the only
CEO of a U.S. company in attendance; since then, many more U.S.
organizations have associated themselves with the initiative. At the
launch, Knight announced Nike's "support of mandatory global standards for
social auditing," asserting that "every company should have to report on
their performance" against these standards. His proposal meant that Nike's
suppliers and competitors would have to share the financial burden of
securing a regulated level of worker conditions in global supply chains.
When the social performance records of all the companies were made public,
Knight believed, Nike would be revealed as a leader, which would help
protect the brand.
In early 2004, Nike convened high-profile players from the international
labor, development, human rights, and environmental movements at its
Beaverton, Oregon, headquarters. Their willingness to attend was itself a
testament to how far Nike had progressedâ?"from a target of attack to a
convener of erstwhile critics. Even more notable was the fact that the
topics discussed weren't specific to Nike's operations. The conversations
focused on the potential negative fallout from the MFA's demise.
The end of the agreement raises the challenge of how to assist countries
with garment industries that may be suddenly rendered far less competitive
in international markets. For example, a significant portion of the
export-oriented garment industry in Bangladesh is at risk. Today, that
sector employs upward of two million people and accounts for 75% of the
country's foreign-exchange earnings. Similar data for countries in Latin
America, Africa, and Asia highlight the potentially disastrous social and
economic fallout if the transition to a post-MFA world is botched.
The MFA is ending partly because of the lobbying by NGOs and governments
of key exporting countries; they argued that the agreement was a barrier
to trade for developing countries. Even though companies will be
downsizing, relocating, and consolidating in response to the MFA's demise,
the business community was not a significant player in this trade change
and, in fairness, cannot be held responsible. However, the public is
already focusing on which companies are laying off workers and with what
effects. Nike is one of a few companies that believe, regardless of how
this situation arose, they must be part of the solution if they don't want
to be seen as part of the problem.
So Nike has joined a group of organizationsâ?"including companies such as
U.S. retailer the Gap and UK retailer Asda; NGOs such as Oxfam
International and AccountAbility; labor organizations such as the
International Textile, Garment, and Leather Workers Federation; and
multistakeholder initiatives such as the ETI, the FLA, and the Global
Compactâ?"to explore how such an alliance could help to address the
challenges of a post-MFA world. This alliance might be well placed to
advise governments and agencies like the World Bank on ways to develop
public programs to assist workers in the transition; establish a framework
to guide companies in their realignment of their supply chains; or lobby
for changes to trade policies that would confer benefits to factories and
countries that took labor issues into greater account.
Nike is, of course, a business, and as such is accountable to its
shareholders. But the company has taken significant steps in evolving a
strategy and practice that shifts it from being an object of civil
activism to a key participant in civil society initiatives and processes.
***
In dealing with the challenges of corporate responsibility, Nike has come
to view the issue as integral to the realities of globalizationâ?"and a
major source of learning, relevant to its core business strategy and
practices. That learning prompted the company to adopt codes of labor
conduct, forge alliances with labor and civil society organizations,
develop nonfinancial metrics for compliance that are linked to the
company's management and its broader governance, and engage in the
international debate about the role of business in society and in public
policy.
As Nike's experience shows, the often talked-up business benefits of
corporate responsibility are, at best, hard-won and frequently, in the
short term, ephemeral or nonexistent. When accusations arise, it's easy
for companies to focus on the low-hanging fruitâ?"employee morale, for
instance, or the immediate need to defend the brand. But making business
logic out of a deeper sense of corporate responsibility requires
courageous leadershipâ?"in particular, civil leadershipâ?"insightful
learning, and a grounded process for organizational innovation.
The Civil-Learning Tool
The civil-learning tool is intended to help companies see where they and
their competitors fall on a particular societal issue. It can help
organizations figure out how to develop and position their future business
strategies in ways that society will embrace.
The tool factors in the two different types of learning, organizational
and societal. When an issue is just starting to evolve, companies can get
away with defensive actions and deflections of responsibility. But the
more mature an issue becomes, the further up the learning curve an
organization must be to avoid risk and to take advantage of opportunities.

As the tool makes clear, there is a point where the risky red zone turns
into the higher-opportunity green zone. The question for most companies
is, "Where is that line for my organization?" The answer depends on a host
of factors, and a company's actions can actually shift the line in its
favor. A company might step way out in front of an immature issue while
most of its rivals are still in defensive mode. Cases in point: BP's
aggressive stance on publishing the amount of royalties it pays to host
governments; Rio Tinto's adoption of a human rights policy when most
companies would not go near the idea; and Levi Strauss's groundbreaking
"terms of engagement," which set out the company's responsibilities to
workers in its global supply chains.
Additionally, events in one industry can affect companies in a different
industry or organizations in the same industry that are facing different
issues. For example, the heated public debate about the pricing of drugs
in poorer communities has created a broader debate about the fundamentals
of intellectual property rights and the merits of a preventive approach to
health at a time when the pharmaceutical industry makes its money from
treating illnesses. Similarly, the emergence of obesity as an issue for
the food industry has been accelerated by both rising health care costs
and the devastating impact of litigation on the tobacco industry.
Being Good Doesn't Always Pay
There is no universal business case for being good, despite what we might
wish. Civil regulation, attacks by NGOs to damage corporate reputations,
and the like rarely cause measurable, long-term damage to a fundamentally
strong business. In the short term, which is what most investors focus on,
variations in financial performance are usually attributable to business
fundamentals such as design, cost of sales, and market forecasting.
Nike has been highly profitable the past three decadesâ?"a period in
which it was also subjected to continuous and vociferous opposition to its
business practices. Consider the global media coverage of the company's
alleged malpractices and the widespread anti-Nike protests at North
American universities (a core market segment for Nike). Yet institutional
investors have shown a startling disinterest in Nike's handling of its
labor standards.
The high-profile, two-year case of activist Marc Kasky versus Nike brought
the company before the California and federal supreme courts for allegedly
misrepresenting the state of labor standards in its supplier factories.
Even now, after an out-of-court settlement, the case raises the specter of
further legal action against Nike and others based on similar claims of
commercial misstatements. Yet the case has barely raised an eyebrow from
the mainstream investment community. Coping with such challenges, it
seems, is simply an acceptable overhead cost of doing business.
That's not to say, however, that responsible business practices cannot
pay. As with any business opportunity, the chances to make money by being
good must be created, not found. Reinventing one's business isn't easy.
And doing so in socially responsible ways involves a major shift in
managerial mind-setâ?"from a risk-based, reputational view of corporate
responsibility to one focused on product and process innovations that will
help to realign the business and the market according to shifting societal
concerns.

Of porpoises and plantations: Mr Diamond finds other examples of poor environmental stewardship that led to calamity

History on an environmental scale

Of porpoises and plantations
Jan 13th 2005
From The Economist print edition




Alamy





When communities self-destruct

JARED DIAMOND likes his subjects big. His best-known book, ?Guns, Germs
and Steel?, was in some editions subtitled ?A short history of everybody
for the last 13,000 years?. This was no conventional history; rather, the
author tried to explain the environmental factors behind the rise of
various human civilisations. It was a terrific read and full of surprising
subplots, such as why some animals can be domesticated and others cannot,
and why agriculture spread to some societies but not others.
Now Mr Diamond, a professor of geography at the University of California,
attempts to tackle the opposite question, that is, why some societies
collapse. Again, he focuses on long-term environmental factors rather than
on short-term political ones. Since Mr Diamond is a restless traveller, a
ravenous researcher and a sparky writer, the result is gripping.
Among the collapses, he describes the civilisation of Easter Island three
centuries ago, whose fall, he argues convincingly, was caused largely by
deforestation. Transporting and erecting those extraordinary stone statues
required a lot of wood. The early Easter Islanders also used wood to cook
their food, cremate their dead and build large canoes. As the population
grew, they cut down the big trees.
The ecosystem was wrecked. The soil was rendered infertile, and, with no
big logs left with which to build seaworthy craft, the islanders had no
means of escape. They could not even paddle far enough out to catch
porpoises, which had been a chief source of protein. They ate their land
birds to extinction and then they starved. Wars erupted, in which the
victors ate the vanquished. A popular insult at the time, apparently, was:
?The flesh of your mother sticks between my teeth.?
The circumstances of a dry, windblown and isolated Pacific island are
unusual, yet Mr Diamond finds other examples of poor environmental
stewardship that led to calamity, or at least contributed to it. In
Rwanda, where the conventional (and certainly correct) account of the
genocide of 1994 is that extremist politicians goaded Hutus to kill
Tutsis, Mr Diamond notes that mass killing occurred even in an area where
there lived only a single Tutsi.
That lone Tutsi was killed, but so too were 5% of the Hutus in this area
of 2,000 inhabitants, by other Hutus. Why? Part of the explanation must
lie with Rwanda's over-population. Although the country is less densely
peopled than, say, Belgium, it has more mouths to be fed by subsistence
farming without modern tools.
The homogeneous Hutu area that Mr Diamond describes was especially
cramped. All farmland was occupied, and practically everyone was hungry.
Uneducated young men could not leave home, set up their own farms, marry
and settle down, because space was lacking. Between 1988 and 1993 the
proportion of young men living at home with their parents rose from 71% to
100%. That is, not one man in his 20s was self-supporting. To put it
mildly, this created tensions. Conflicts between neighbours were common.
When the genocide began and normal rules were put on hold, many of these
listless young men murdered their richer neighbours, in the hope of
seizing their land or cows.
One of the appealing things about this book is that Mr Diamond does not
overstate his case for dramatic effect. He does not argue, as some have
done, that overpopulation leads inevitably to genocide. He stresses the
culpability of the Rwandan politicians who, to crush a Tutsi-led
insurrection, imported tens of thousands of machetes and orchestrated the
mass murder of Tutsis. He understands that they could have chosen to
tackle their problems in a less evil manner. His point is merely that when
people are starving because they do not have enough land, it is surely
easier to persuade them to kill their neighbours.
Another appealing aspect is that although Mr Diamond is patently alarmed
about the state of the world, he believes that things will come right in
the end. This ?cautious optimism?, as he calls it (though too cautious for
this reviewer), is informed by a wide-ranging study of societies that have
figured out how to manage their environments sustainably.
His account of how deforestation was reversed in 17th-century Japan, for
example, is a heartening case. Because the country was politically stable,
the shoguns were able to plan for the long term. They imposed sensible
regulations as to who could fell how many trees and how much they should
pay for the privilege. They encouraged commercial replanting. And they
also enforced something like property rights over farmland and fisheries,
thus avoiding a tragedy of the commons.
Errors are probably inevitable in a book of this scope, though some of
them jar. It is absurd, for example, to claim that, today, 80% of the
world's population live ?near or below the starvation level?. The real
figure is less than 15%, unless you take a very loose definition of the
word ?near?. The author's attempt to rebut the idea that greenery costs
money is similarly hampered by lousy statistics. Overall, however, the
book fulfils its huge ambition, and Mr Diamond is the only man who could
have written it.
Collapse: How Societies Choose to Fail or Survive.
By Jared Diamond.
Viking Books; 575 pages; $29.95. Penguin/Allen Lane; £20

18.1.05

Honda Announces New Greener Vehicles

Honda Announces New Greener Vehicles
Source: GreenBiz.com
DETROIT, Mich., Jan. 12, 2005 - Honda Motor Co.?s CEO Takeo Fukui
announced several new and environmental initiatives for Honda and Acura
vehicles as he reinforced the company's commitment to leadership in these
critical areas of social responsibility.

Fukui announced plans to further advance and expand the use of Honda
fuel-efficient technologies including its hybrid technology and Variable
Cylinder Management (VCM) system. VCM will be applied to the 2006 Honda
Pilot sport-utility vehicle scheduled to debut this fall. VCM deactivates
three of the engine's six cylinders during cruising, deceleration and
other low engine load conditions to reduce fuel consumption. This
technology was first introduced in the U.S. in 2004 on the all-new 2005
Odyssey minivan and 2005 Accord Hybrid.

In addition, the 2006 Civic will be powered by the newest generation of
Honda's i-VTEC engine technology to achieve even higher fuel economy and
lower emissions. And a new Civic Hybrid will feature enhancements to
Honda's IMA hybrid technology to achieve significantly higher fuel economy
and performance. The natural gas Civic GX, powered by the cleanest
internal combustion engine in the world, will continue to be made in Ohio.


Honda also announced its plans to place a fuel cell vehicle with an
individual customer. The company will seek out interested parties to
become the first private individual to lease its FCX fuel cell vehicle for
regular everyday use. The 2005 FCX is the world's most advanced fuel cell
vehicle and the only FCV to earn certification from the U.S. EPA and
California's Air Resources Board (CARB). It is powered by Honda's
originally developed fuel cell stack (Honda FC Stack) with the
breakthrough ability to start and operate in below freezing temperatures,
along with significantly improved performance, efficiency and range.


Framework Business ethics?

Framework Business ethics?
Elfren Sicangco Cruz
988 words
11 January 2005
BusinessWorld
4
English
(c) 2005 Business World Publishing Corporation.
Business ethics assumes that, for some reason, the ordinary rules of
ethics do not apply to business.
- Peter Drucker
There is an urgent need, in today's business world, to reaffirm the
validity of this statement.
There is a misguided belief that business corporations have become
powerful only in contemporary times. Business enterprises have always been
the primary vehicles for economic progress (or lack of progress) in all
economies.
It was the East India Co., and not the British Empire, that first
conquered India in the 17th century. In the 15th century, it was the
Medici business empire that made Italy the center of banking and the
Renaissance. The Hudson Bay Co. and other fur traders opened the North
American West in the 18th century. The list of giant multinational
business corporations and their influence is chronicled throughout the
history of civilizations.
There are two facts about these types of enterprises. The first is that
they all have limited life span. At the beginning of the 20th century,
there were 10 companies on the Dow Jones list. Today, only one of the 10
is still operating.
The other reality is that these businesses, during their lifetime, can
create tremendous benefits or havoc to society. In just the last few
years, there has been a lot of publicity about the unfair practices of
major corporations like Enron and Marsh, the world's largest insurance
broker.
Perhaps, this is the reason for the growing popularity for the study of
so-called business ethics.
According to Manuel Velasquez, "Business ethics is a study of moral
standards and how these apply to the systems and organizations through
which modern societies produce and distribute goods and services, and to
the people who work within these organizations. Business ethics, in other
words, is a form of applied ethics. It includes not only the analysis of
moral norms and values, but also attempts to apply the conclusions of this
analysis to that assortment of institutions, technologies, transactions,
activities and pursuits that we call business."
The definition suggests that there is a separate set of ethics for
business and that corporations are subject to moral judgments. These two
conclusions have been disputed by management thinkers.
Peter Drucker is considered as the most influential management guru in
modern times. This is what he says about business ethics.
"The fundamental axiom on which the Western tradition of ethics has always
been based on is: There is only one code of ethics, that of individual
behavior, for prince and pauper, for rich and poor, for the mighty and the
meek alike. Ethics - in the Judeo Christian tradition, is the affirmation
that all men are alike creatures - whether the Creator be called God,
Nature, or Society.
"There is only one ethics, one set of rules of morality, one code, that of
individual behavior in which the same rules apply to everyone alike. And
this fundamental axiom business ethics denies. Business ethics, in other
words, is not ethics at all, as the term has been commonly used by Western
philosophers and Western theologians."
What is business ethics then?
In his classic book, Competitive Strategy, Michael Porter described the
basis for strategy in his introduction to the book.
"At the broadest level, formulating competitive strategy involves the
consideration of four key factors that determine the limits of what a
company can successfully accomplish. The company's strengths and
weaknesses are its profile of assets and skills relative to competitors
including ... The personal values of an organization are the motivations
and needs of key executives and other personnel who must implement the
chosen strategy. Strengths and weaknesses, combined with values, determine
the internal (to the company) limits to competitive strategy a company can
successfully adopt.
"The external limits are determined by its industry and broader
environment. Industry opportunities and threats define the competitive
environment, with its attendant risks and potential rewards. Societal
expectations reflects the impact on the company of such things as
government policy, social concerns, mores, and many others.
"These four factors must be considered before a business can develop a
realistic and implementable set of goals and policies."
Some managers may feel that their choice of objectives and strategies are
entirely objective. This is true only if they included their personal
values among the elements they took into account for their analysis and
decisions.
It is quite clear that, on the basis both of observation and of systematic
studies, personal values are critical determinants in the choice of
corporate objectives and strategies. (Guth and Taguiru HBR September-
October 1965). In other words, all corporate acts are the result of
choices and decisions made by human individuals.
Business decision makers and implementers must accept personal
responsibility for the outcome of any actions undertaken by their
corporation. Media owners must accept moral responsibility for the type of
coverage of their media outlets. It cannot be justified by the need to be
profitable with the excuse that personal values and corporate needs are
separate issues. Products that harm consumers and the environment are not
the fault of any corporations, but of the people who manage the company.
Henry Sy was right when he and his family accepted responsibility for the
type of movies being shown in the movie theaters they owned.
Finally, corporate owners and managers cannot expect corporate
philanthropy to be the atonement for any harm their businesses have
inflicted on society. This is like buying indulgences or that a person's
moral standards is based on the size of his donations to the Church or
spending a little time giving charity to poor people.
A person cannot separate personal values of what is right and wrong from
the values he or she puts into practice at work.
Elfren S. Cruz is a professor of Strategic Management at the De La Salle
University Graduate School of Business. E-mail comments to
cruzes@info.com.ph.

SRI makes sense in the long run

SRI makes sense in the long run
Freelance Writer
856 words
13 January 2005
Winnipeg Free Press
a13
English
All material copyright Winnipeg Free Press, a division of FP Canadian
Newspapers Limited Partnership. All rights reserved.
Eugene Ellmen Financial commentators are raising questions about the role
of socially responsible investment in the affairs of three major Manitoba
financial institutions -- the Crocus Investment Fund, the Workers
Compensation Board and the Teachers Retirement Allowances Fund. But while
these critics suggest that socially responsible investment has hurt
investor returns, they are ignoring a wealth of evidence to show the
benefits of incorporating social and environmental issues into the
investment process.
Tom Ulrich, former president of the Teachers' Fund, has suggested that
socially responsible investment -- or SRI, as it is known -- would put the
retirement security of teachers at risk. Conservative finance critic John
Loewen says it's wrong to invest on any other basis than the best returns
for shareholders.
Even investment guru Gordon Pape has weighed in on this issue, saying
"anybody that has a mandate to invest public money on behalf of the public
should not be hindered by any constraints."
Do Manitobans have reason to be worried?
Unfortunately, the statements from Ulrich, Loewen, Pape and others ignore
a growing consensus in the financial community. The evidence of SRI and
investment returns shows that you can invest with social and environmental
considerations without impairing profits.
And, rather than compromising good investment management, SRI allows
managers to take a longer-term, more comprehensive look at the companies
in which they invest. SRI gives managers the necessary tools to understand
the social and environmental context of the companies in which they are
investing. The result is better and more complete investment
decision-making.
The concept of SRI, while relatively new, is quite simple. Rather than
looking solely at the traditional financial factors of risk and return,
SRI takes a broader look at companies' social and environmental records.
SRI analysts look into issues of how companies treat their employees, how
they help or hinder environmental sustainability, how they operate in
developing countries, and how they are regarded in their communities at
home.
In some cases, SRI investors employ "screens" to rule out certain choices
(tobacco stocks, for example, in some hospital foundations) or to direct
portfolio managers to invest in certain sectors or companies. But, more
commonly among mainstream investors, SRI is used as an analytical tool to
assess the valuations of companies.
Analysts are looking at issues such as global warming, identifying
companies like Suncor which stand to benefit from investments in renewable
energy, and flagging companies such as Imperial Oil, which is committed to
an oil-only strategy. These analysts examine how the Kyoto Protocol, the
Canadian government's one-tonne greenhouse-gas reduction initiative and
carbon-trading markets favour companies that intend to reduce their
climate-change impacts.
Such an analysis allows investors to properly value companies, looking for
signs of over-valuation in socially or environmentally risky stocks, and
undervaluation in companies that will benefit from social and
sustainability trends.
Major international financial institutions are starting to embrace this
way of looking at investments. Recently, a group of European institutional
investors managing more than $590 billion in assets launched an initiative
on "enhanced analytics," encouraging brokerage firms to look at
non-financial factors in stock evaluation.
In Canada, some large pension funds are beginning to use SRI tools. The
$18.7-billion Hospitals of Ontario Pension Plan, for example, considers
environmental, social and ethical matters to assess risks that could
affect future returns and shareholder value. The plan also applies this
approach to voting its share proxies to encourage disclosure in the areas
of environmental, social and ethical matters.
One of the reasons why institutional investors are looking at these issues
is that they are linked to favourable investment returns. In the U.S., for
example, analysts have been tracking the performance of the Domini Social
Index (a basket of 400 socially responsible stocks) for more than a
decade. In the 10 years to the end of Dec. 31, 2004, the DSI has produced
annual returns of 12.9 per cent, considerably higher than comparable
returns from Standard and Poor's 500 at 12.1 per cent.
The analysts are still at work studying the exact relationship between
social responsibility and investment performance. But when Gordon Pape
suggests that investment portfolios should be free of non-financial
"constraints," he is turning his back on a useful and prudent investment
tool.
To those of us in the SRI community, it only makes sense that companies
which treat their employees well, behave in a respectful manner at home
and abroad, and contribute to environmental sustainability will be the
companies that perform well for investors over the long term.
Rather than worrying that social and environmental tools have hurt
investment returns at their major investment funds, Manitobans and the
provincial government should encourage their financial institutions to
continue to look at this sensible and far-sighted approach to investment.
Eugene Ellmen is Executive Director of the Social Investment Organization,
based in Toronto. The SIO includes financial institutions, asset
management firms, investment funds, advisors and investors with an
interest in socially responsible investment. Winnipeg-based Crocus
Investment Fund is a member of the SIO.

Eco-friendly and all the richer for it

Eco-friendly and all the richer for it
JOANNA TOVIA
MATP
504 words
18 January 2005
Daily Telegraph
1 - State
26
English
Copyright 2005 News Ltd. All Rights Reserved
SUSTAINABILITY
Green businesses are the way of the future, writes Joanna Tovia
HOW eco-friendly is your business? If you want your business to survive
into the future, it's time to go green.
Experts say small businesses wanting to grow and compete against big
business should follow their lead. A shift in consumer values, demand for
greater transparency and alarming environmental evidence is starting to
force businesses into going green.
Businesses who do take environmental issues into account are discovering
some unexpected benefits. Research shows big businesses who toe the green
line earn higher profits as a result and the same can be true for small
businesses.
Australian Conservation Foundation legal adviser Chuck Berger says
although it's often more difficult for a small business to understand and
implement sustainability, in principle the issues are the same.
"There are competitive advantages and savings in terms of efficiency and
resource usage that are just the same as for big businesses," Berger says.

Social and environmental factors, economics and shareholder value make up
what is often referred to as the "triple bottom line", a term coined by US
sustainability expert John Elkington.
In his chapter of the book The Triple Bottom Line, Elkington says growing
numbers of companies are already finding themselves challenged by
consumers and the financial markets about aspects of their triple bottom
line commitments and performance.
Elkington says the power of people's values should not be underestimated.
He says values change every generation and have the power to cause
companies to crash and burn.
"Companies that have felt themselves standing on solid ground for decades
suddenly find that the world as they knew it is being turned upside down
and inside out."
This, combined with the demand for increased transparency, will have
companies contemplating their triple bottom line more than ever before.
"Pressures will continuously build on both corporations and governments to
make a transition to sustainable development," he writes.
If sustainability is the way of the future, it makes sense to turn your
business green sooner rather than later.
According to the Small Business Development Corporation, sustainability
involves considering not only the economic impacts of your key business
decisions, but the social and environmental impacts as well.
The good news is that turning your business green needn't involve
sacrifices. In fact, the opposite is true.
The SBDC says green businesses benefit in the following ways:
* Increased profits -- sustainability can save you money and even make you
money.
* Satisfying customer demand -- customer values are shifting and customers
want to support businesses that have adopted sustainable practices and
want to buy products and services that are environmentally and socially
friendly.
* Increased innovation -- there is plenty of opportunity for new markets
and products and services to be identified and developed in response to
demand for sustainable solutions.
Contributing to sustainability also offers good marketing opportunities
that put your business in a positive light.

CSR backlash

CSR backlash
Terence Corcoran
National Post
1,056 words
15 January 2005
National Post
National
FP11
English
(c) 2005 National Post . All Rights Reserved.
In classic CBC form, the producers of the network's flagship morning
public affairs show, The Current, turned their guns on corporations.
Following the format of juvenile college radio journalism, one of the
show's staff went out to nail a couple of major corporations for their
feeble attempts to bring corporate social responsibility to the tsunami
crisis. Holt Renfrew's offer to turn 10% of a day's revenue to tsumani aid
was portrayed as a cheap ploy. "Why just one day?" At Starbucks, The
Current's reporter found she'd have to buy 50 pounds of coffee worth
$772.50 to get the company to send $100 to Sumatra.
The running implication of the segment, titled "Shopping for Tsunami," is
that corporate efforts to bolster their social responsibility are at best
self-serving promotions not worthy of consumer attention. Indeed, by
publicly declaring their Corporate Social Responsibility (CSR) principles,
most corporations open themselves up to even more criticism. On Rogers
Radio's all-news station in Toronto recently, a reporter hit the banks and
their CEOs for not providing enough tsunami aid.
The lesson to business: No amount of CSR will ever be enough. The campaign
to turn corporations into vehicles of social policy and wealth
redistribution is not motivated by a simple belief that corporations need
to do more good in society. The major forces pushing CSR on corporations
are grounded in much more than any sense of charity or human kindness.
An example of the true nature of the CSR movement can be found in the
illustration above. It's the work of a Grade 2 student at a school in
Fairfield, Conn., hometown of William B. Harrison, chief executive of JP
Morgan Chase of New York. Just before Christmas, more than 700 similar
drawings by elementary students all over the world were hand delivered to
JP Morgan's head office on Park Avenue. The objective, using Fairfield's
elementary students, is to get JP Morgan to adopt a comprehensive
environment policy.
The key organizer of this exercise in ideological child abuse is the
Rainforest Action Network, a long-time activist group that has been
harassing major corporations for two decades. It has targeted Home Depot,
Burger King, Trade Joe's, Weyerhauser, Bank of America, Wells Fargo and
Citigroup. RAN wants JP Morgan to adopt a code similar to one signed by
Bank of America saying it would impose new industry standards to protect
forests and reduce greenhouse gases that are linked to global warming.
RAN's moves against JP Morgan are just the latest in what is now an
escalating 30-year-old movement, with roots in radical leftism, to use CSR
as a back door into what they see as the heart of political and economic
power: the corporation. For the most part, major corporations buy into the
theory of corporate social responsibility. It is no accident that the
companies most publicly dedicated to CSR -- from Starbucks to the banks
and Home Depot -- are the ones that are most often targeted and harassed
by activists.
As the CSR movement expands, a bit of a backlash is beginning to develop.
A new Web site, www.CSRwatch.com , has sprung up. It's a lively source of
daily news on what it calls "the anti-business movement" behind CSR.
Yesterday's items include a link to a coming study by Arthur Laffer on the
economic performance of 28 companies considered the most socially
responsible by Business Ethics magazine. Another item says "Ethical
advisor goes bust: One of Britain's biggest firms of ethical investment
advisors has collapsed."
The Laffer paper was sponsored by the Competitive Enterprise Institute,
which in turn has just published a book, The Role of Business in the
Modern World, by David Henderson. Mr. Henderson is former head of
economics at the Organization for Economic Co-operation and Development in
Paris. He takes a scholarly scalpel to the CSR movement. He exposes CSR's
lack of economic foundation and the risks it poses to growth and
prosperity if modern corporations sacrifice profits as their primary goal
and instead adopt variations on CSR and sustainable development.
CSR calls on companies to pursue social objectives -- job creation, wealth
redistribution, external environmental objectives, foreign aid, cultural
diversity and social justice. Whatever these things come to mean in
practice, they undermine corporate pursuit of profits in a market economy.
Henderson says general adoption of CSR would hamper profitability and
reduce general welfare. Going a step further, he sees a perverse outcome.
Insofar as CSR "brings with it new forms of over-regulation and further
deviations from the competitive norm, it would actually make profitability
a worse indicator of an enterprise's contribution to the general welfare:
it is itself a potential source of profit contamination."
While Henderson's book (see Steve Forbes below) is broad and scholarly,
another book takes a much more aggressive attack on CSR. Biz-War and the
Out-of-Power Elite: The Progressive-Left Attack on the Corporation, by
Jarol B. Manhein, is a muckraking excavation of the birth and history of
the CSR movement. Not all of it is sound, but there's enough muck in the
pages of Biz-War to open the eyes of most naive public relations types who
do much of the corporate CSR spear carrying.
Want to know the origins of the Rainforest Action Network? Or Tom Hayden's
role back in the 1960s when, sensing the New Left was going nowhere with
direct activism, he singled out revolutionizing corporate behaviour as the
way to radicalize American power. The CSR movement, full of seemingly
benign interest in human welfare, is in fact a front for the most radical
anti-business and anti-freedom elements of U.S. leftism. It may not quite
by the conspiracy outlined in Biz-War, but there's no denying the
ideological roots that today bring us corporate ethics codes, the CBC's
news agenda and the artistic achievements of children in Grade 2.
Black & White Photo: Ideological child abuse? In a campaign organized by
Rainforest Action Network, posters drawn by children around the world were
delivered to U.S. bank J.P. Morgan, urging its CEO to "stop lending money
to projects that destroy endangered forests."

A new long-term view; A sustainability analysis looks upon a company's ability to manage SRI issues as a proxy to management quality

A new long-term view; A sustainability analysis looks upon a company's
ability to manage SRI issues as a proxy to management quality
Matthew J. Kiernan
1,028 words
10 January 2005
Pensions & Investments
10
Volume 33; Number 1
English
(c) 2005 Crain Communications, Inc. All rights reserved.
In recent months, state treasurers, pension fund trustees, money managers
and other fiduciaries have all been taking a fresh, hard look at
``socially responsible investing'' and, increasingly, they are liking what
they see.
The genesis of this new enthusiasm is the emergence of a much clearer
distinction between two very different approaches to SRI that had
previously been mixed together and confused.
That older, more established approach relies primarily on screening out
``undesirable'' companies, based on the investor's personal or collective
organizational values. This ``old-school'' SRI has historically
encountered tremendous resistance from mainstream institutional investors
and their advisers, for at least three reasons:
* The enormous difficulty of crafting a single set of ethical norms to
which a large, heterogeneous group of retirees and beneficiaries could all
subscribe;
* The deep-seated (but rarely examined) belief that companies' social and
environmental performance are at best irrelevant and at worst actually
injurious to their financial returns; and
* The corollary view that, since returns are ``inevitably'' compromised,
the imperatives of fiduciary responsibility demand that social and
environmental factors be set to one side when investment decisions are
made.
There is, however, a newer, quite different approach to SRI. Instead of
attempting to make ethical value judgements, this approach, more
accurately described as ``sustainability'' investing, views companies'
ability to manage complex SRI issues primarily as a proxy and leading
indicator for their overall management quality. Under this view, strong
SRI performance can therefore become a potential source of competitive
advantage, superior profitability, and share price out-performance.
I have considerable sympathy for this new school. After all, what sterner
test of management quality is there than the ever-changing kaleidoscope of
tightening regulations, shifting public and consumer expectations, and
competing stakeholders created by business challenges as diversified as
climate change, human rights and HIV/AIDS?
The case for using SRI performance as a proxy for management quality was
nicely summarized in a recent United Nations report endorsed by Goldman
Sachs & Co., Morgan Stanley & Co. and a number of other leading mainstream
financial houses. The report said: ``In a more globalized, interconnected
and competitive world, the way that environmental, social and corporate
governance issues are managed is part of companies' overall management
quality needed to compete successfully. Companies that perform better with
regards to these issues can increase shareholder value.''
This emerging viewpoint has already been reflected in changes to pension
fund legislation in the United Kingdom, much of continental Europe and
Australia. This legislation now obliges fiduciaries to report on their
plans for incorporating company SRI assessments into their investment
strategies. The prudent fiduciary equation has effectively been turned on
its head; fiduciaries are now viewed as derelict in their responsibilities
if they do not ensure that environmental and social risks have been
addressed.
In North America, despite the lack of any explicit legislation along
similar lines, institutional shareholder activism on environmental and
social issues is increasingly dramatically. Climate change has become the
fastest-growing single category of shareholder resolutions in the United
States. A dozen state treasurers have joined other public and Taft-Hartley
fund leaders in forming the Investor Network on Climate Risk. The INCR has
been pushing both financial regulators and industrial companies to
disclose and address the potential investment risks of climate change. In
California, Treasurer Phil Angelides has announced an ambitious ``green
wave'' initiative, which proposes to invest $1.5 billion of California
pension assets in environmentally enhanced investment vehicles. Contra
Costa County Employees' Retirement Association has been operating a $175
million environmentally enhanced investment strategy for more than two
years now.
There is a growing body of sophisticated investment research that would
appear to validate the thinking behind both the INCR and the green wave
initiatives. One of the most compelling was a study conducted in 2004 by a
group of Dutch finance academics including Rob Bauer, who also is head of
research for Stichting Pensioenfonds ABP, Heerlen, the Netherlands, one of
the largest pension funds in the world. Mr. Bauer's research took great
pains to eliminate the impact of each of the traditional drivers of
investment returns, in order to focus exclusively on any financial impact
of SRI factors. His conclusion: In the case of U.S. large-cap stocks, SRI
factors had added roughly six percentage points per year. Similar findings
have also emerged from a recent study undertaken at State Street Global
Advisors' Advanced Research Center in Boston, and from a myriad of others.
The SSgA center's study found an SRI-enhanced portfolio out-performed its
benchmark by nearly seven percentage points per year, with roughly two
percentage points of that directly attributable to SRI factors.
SRI factors will become even more critical to investors. Several powerful
global megatrends are already at work to increase the ``SRI risk premium''
even further:
* Tightening national, regional and global regulatory requirements for
stronger company performance and disclosure of non-traditional business
and investment risks.
* The expansion and intensification of industrial competition into
emerging markets, exponentially increasing the level of risk for both
major corporations and investors from these new, non-traditional factors.
* Changing attitudes of both consumers and investors, substantially
increasing the saliency and financial stakes of companies' environmental,
social, and governance performance.
* A substantial broadening of what is considered legitimate fiduciary
responsibility to include companies' performance on these new issues.
* Growing pressures from international non-governmental organizations,
armed with unprecedented resources, access to company data, credibility
and global communications capabilities.
* A growing inclination - and capability - among major institutional
investors for shareholder activism in the governance of their portfolio
companies on these issues.
Taken together, these trends form a virtually irresistible force that
seems certain to transform the investment landscape for at least the next
decade.
Matthew J. Kiernan is chief executive of Innovest Strategic Value
Advisors, Richmond Hill, Ontario. Innovest is subadviser to the Contra
Costa County (Calif.) Employees' Retirement Association for a
sustainability enhanced portfolio; it also contributed to comments to the
United Nations' report at the organization's request.