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[McKinsey] What is the business of business? By building social issues into strategy, big companies can recast the debate about their role in society.

What is the business of business?
By building social issues into strategy, big companies can recast the
debate about their role in society.
Ian Davis
The McKinsey Quarterly, 2005 Number 3

The great, long-running debate about business's role in society is
currently caught between two contrasting, and tired, ideological
positions.On one side of the current debate are those who argue that, to
borrow Milton Friedman's phrase, "the business of business is business."
This belief, most established in Anglo-Saxon economies, implies that
social issues are peripheral to the challenges of corporate management.
The sole legitimate purpose of business is to create shareholder value. On
the other side are the proponents of corporate social responsibility, a
rapidly growing, rather fuzzy movement encompassing companies that claim
that they already practice the principles of CSR and skeptical advocacy
groups arguing that they must go further in mitigating their social
impact. As other regions of the world—parts of continental Europe, for
example—move toward the Anglo-Saxon shareholder value model, the debate
between these points of view has increasingly taken on global
Both perspectives obscure, in different ways, the significance of social
issues to business success. They also unhelpfully caricature the
contribution of business to social welfare. It is time for CEOs of big
companies to recast this debate and recapture the intellectual and moral
high ground from their critics.
Large companies must build social issues into strategy in a way that
reflects their actual business importance. Such companies need to
articulate their social contribution and to define their ultimate purpose
in a way that is more subtle than "the business of business is business"
and less defensive than most current CSR approaches. It can help to view
the relationship between big business and society as an implicit social
contract—Rousseau adapted to the corporate world, you might say. This
contract has obligations, opportunities, and advantages for both sides.
To explain the basis for such an approach, it may help first to pinpoint
the limitations of the two current ideological poles. Start with "the
business of business is business." The issue here is not primarily legal:
in many countries, such as Germany, companies have a legal obligation to
stakeholders, and even in the United States the legal primacy of
shareholders is open to very broad interpretation.
The problem with the "business of business is business" mind-set is rather
that it can obscure two important realities. The first is that social
issues are not so much tangential to the business of business as
fundamental to it. From a defensive point of view, companies that ignore
public sentiment make themselves vulnerable to attack. Social pressures
can also serve as early indicators of factors essential to corporate
profitability: for example, the regulations and public-policy environment
in which companies must operate, the appetite of consumers for certain
goods above others, and the motivation of employees—and their willingness
to be hired in the first place.
Companies that treat social issues as either irritating distractions or
simply unjustified vehicles for attacks on business are turning a blind
eye to impending forces that have the potential to alter the strategic
future in fundamental ways. Although the effects of social pressures on
these forces may not be immediate, that is not a reason for companies to
delay preparing for or tackling them. Even from a strict shareholder
perspective, most stock market value—typically, more than 80 percent in US
and Western European public markets—depends on expectations of corporate
cash flows beyond the next three years.
Examples abound of the long-term business impact of social issues. That
impact is growing fast. In the pharmaceutical sector, the past decade's
storm of social pressures—stemming from issues such as public perceptions
of excessive prices charged for HIV/AIDS drugs in developing countries—are
now translating into a general (and sometimes seemingly indiscriminate)
toughening of the regulatory environment. In the food and restaurant
sector, meanwhile, the long-escalating debate about obesity is now
resulting in calls for further controls on the marketing of unhealthy
foods. In the case of big financial institutions, concerns about conflicts
of interest and the mis-selling of products have recently led to changes
in core business practices and industry structure. For some big retailers,
public and planning resistance to new stores is constraining growth
opportunities. And all this is to say nothing of the way social and
political pressures have reshaped and redefined the tobacco and the oil
and mining industries, among others, over the decades.
In all such cases, billions of dollars of shareholder value have been put
at stake as a result of social issues that ultimately feed into the
fundamental drivers of corporate performance. In many instances, a
"business of business is business" outlook has blinded companies to
outcomes, or to shifts in the implicit social contract, that often could
have been anticipated.
Just as important, these outcomes have not just posed risks to companies
but also generated value creation opportunities: in the case of the
pharmaceutical sector, for example, the growing market for generic drugs;
in the case of fast-food restaurants, providing healthier meals; and in
the case of the energy industry, meeting fast-growing demand (as well as
regulatory pressure) for cleaner fuels such as natural gas. Social
pressures often indicate the existence of unmet social needs or consumer
preferences. Businesses can gain advantage by spotting and supplying these
before their competitors do.
Paradoxically, therefore, the language of shareholder value may in this
respect hinder companies from maximizing their shareholder value.
Practiced as an unthinking mantra, "the business of business is business"
can lead managers to focus excessively on improving the short-term
performance of their businesses, thus neglecting important longer-term
opportunities and issues, including societal pressures, the trust of
customers, and investments in innovation and other growth prospects.
The second point that the "business of business is business" outlook
obscures for many companies—the need to address questions about their
ethics and legitimacy—is related to the first. For reasons of integrity
and enlightened self-interest, big companies need to tackle such issues,
with both words and actions. It is neither sufficient nor wise to say that
it is for governments to set laws and for companies simply to operate
within them. Nor is it enough simply to point out that many criticisms of
businesses are unmerited or that those throwing the mud ought also to
examine their own practices and social responsibility. Irrespective of
whether the criticisms are valid, their cumulative effect can shape the
strategic context for companies. It is imperative that businesses seek to
lead rather than merely react to these debates.
Moreover, in certain parts of the world—particularly some poor developing
countries—the rule of law and basic public services are notable by their
absence. This reality can render the "business of business is business"
mind-set positively unhelpful as a guide for corporate action. If
companies operating in such an environment focus too narrowly on
ill-defined local legislation or shy away from broad debates about their
alleged behavior, they are likely to face mounting criticism over their
activities as well as a greater risk of becoming embroiled in local
political tensions.
Is CSR the answer? If only it were. The point is not to criticize the many
laudable CSR initiatives undertaken by individual companies or to dispute
the obvious need for businesses (as for any other social entity) to act
responsibly. It is rather to examine the broad prescriptions proposed by
groups and activists involved with CSR. These prescriptions commonly
include stakeholder dialogue, social and environmental reports, and
corporate policies on ethical issues. This approach is too limited, too
defensive, and too disconnected from corporate strategy.
The defensive posture of CSR springs from its origins. Its popularity as a
set of corporate tactics was driven, in large part, by a series of
anticorporate campaigns in the late 1990s. These campaigns were in turn
given impetus by the antiglobalization protests mounted around the same
time. Since then, companies have been drawn to CSR by nice-sounding if
vague notions such as the "triple bottom line": the idea that companies
can simultaneously serve social and environmental goals as well as earn
profits. Companies have seen CSR as a way to avoid
nongovernmental-organization (NGO) and reputational flak and to mitigate
the rougher edges and consequences of capitalism.
Developing countries must rethink how to attract and regulate investment.
See "The truth about foreign direct investment in emerging markets"
This defensiveness starts the argument on the wrong foot—certainly as far
as business leaders should be concerned. Big business provides huge and
critical contributions to modern society. These are insufficiently
articulated, acknowledged, or understood. Among them are productivity
gains, innovation and research, employment, large-scale investments,
human-capital development, and organization. All of them are, and will be,
essential for future national and global economic welfare. Big business
also supplies investment vehicles that are likely to be central to the
provision of pensions in the aging countries of the Organisation for
Economic Co-operation and Development (OECD). In developing countries,
meanwhile, the entry of multinational companies through foreign direct
investment has often contributed critical capital, technology, skills, and
other poverty-reducing economic spillovers. It is no coincidence that
developing countries place such emphasis on attracting big business and
the investment it can bring to their economies.
CSR is limited as an agenda for corporate action because it fails to
capture the potential importance of social issues for corporate strategy.
Admittedly, companies undertaking a stakeholder dialogue with NGOs will be
more aware, in advance, of potential issues. But tracking NGO opinion is
only part of the process of understanding the range of social pressures
that can ultimately affect core business drivers such as regulations and
consumption patterns.
An obvious next step for companies, having understood the possible
evolution of these broad social pressures, is to map long-term options and
responses. This process clearly needs to be rooted in the development of
strategy. Yet typical CSR initiatives—a new ethical policy here, for
example, or a glossy sustainability report there—are often tangential to
it. It is perfectly possible for a company to follow many prescriptions of
CSR and still be caught short by seismic shifts in the socially driven
business environment. One of the compounding problems is the fact that
many companies have chosen to root their CSR functions too narrowly,
within their public- or corporate-affairs departments. Although such
departments play an important tactical role, they are often geared toward
rebutting criticism and tend to operate at a distance from strategic
decision making within the company.
A contract has two sides, and business must acknowledge that in return for
the ability to function, it is subject to rules and constraints
In the limitations of both CSR and of the "business of business is
business" thinking lie the outlines of a new approach—as relevant for
Chinese, German, and Indian companies as for US and British ones. Three
main strands stand out. The first is a helpfully simple prescription:
businesses should introduce explicit processes to make sure that social
issues and emerging social forces are discussed at the highest levels as
part of overall strategic planning. This point means that executives must
educate and engage their boards of directors. It also means that they need
to develop broad metrics or summaries that usefully describe the relevant
issues, in much the same way that most companies analyze customer trends
today. The risk that stakeholders—including governments, consumer groups,
lawyers, and the media—will mobilize around particular issues can be
roughly estimated by studying the known agendas and interests of these
parties. For example, the likelihood that the obesity debate would rebound
on food companies was partly predictable from the growing expenditures of
governments on obesity-related health problems, the inevitable media focus
on the issue, plus the interest of some lawyers in finding fresh corporate
targets for litigation. By the time businesses seriously engaged with the
question, they were in a defensive posture, merely struggling to catch up
with the public debate. In the future, companies will need to be much
better at understanding and anticipating such issues.
Both the second and third strands of the new approach reflect the idea
that there is an implicit contract between big business and society or
indeed between whole economic sectors and society—the contract that is the
subject of this article. Detractors have often successfully portrayed the
contract as a one-way bargain that benefits business at society's expense.
The reality is much more complex. The activities undertaken by business
have clearly brought social benefits as well as costs. Similarly, however,
there are two sides to a contract, and business must acknowledge that in
return for the ability to function, it is subject to rules and
constraints. At times, the contract can come under obvious strain. The
recent backlash against big business in the United States can be seen as
society seeking to shift the terms of the contract as a result of popular
perceptions that business has abused its power. Similarly, in Germany at
present, business is struggling to defend itself against charges that its
contract with society is fundamentally unbalanced.
The second strand requires companies not just to understand their
individual contracts but also to manage those contracts actively. To do
so, companies can choose from a range of potential tactics, such as more
transparent reporting, shifts in R&D or asset reorganization to capture
expected future opportunities or to shed perceived liabilities, changes in
approaches to regulation, and, at an industry level, the development and
deployment of voluntary standards of behavior.
Some companies and sectors are already experimenting with such
approaches—witness General Electric's recent announcement that it would
double its research spending on environmentally friendlier technologies.
Nonetheless, there is scope for much more activity, provided it is aligned
with corporate strategic goals. Reshaping conduct on an industry-wide and
increasingly global basis may be particularly important, given that the
perceived misdeeds of one company can rebound on its sector as a whole.
An important point to remember is that companies, depending on their
circumstances, will have quite different tactical responses, so
off-the-shelf or simply nice-sounding solutions may not always be
appropriate. Transparency offers a good example. It is easy, but wrong, to
say that there can never be enough of it. What might be good for a
pharmaceutical company trying to restore the consumers' trust could be
damaging for a hedge fund manager. A voluntary code of practice for a
retailer naturally would be very different from that of a copper-mining
This observation leads me to the third strand of the new approach for
business leaders: they need to shape the debate on social issues much more
consciously by establishing ever higher (but appropriate) standards of
integrity and transparency within their own companies and by becoming much
more actively involved in external debates (such as those in the media) on
issues that shape the social context of business.
A starting point may be for CEOs to articulate publicly the purpose of
business in terms less dry than shareholder value, although that should
continue to be seen as the critical measure of business success. However,
it may be more accurate, more motivating—and indeed more beneficial to
shareholder value over the long term—to describe the ultimate purpose of
business as the efficient provision of goods and services that society
This is a hugely valuable, even noble, purpose. It is the basis of the
contract between business and society and the basis of most people's real
interactions with business. CEOs could point out that profits are not an
end in themselves but a signal from society that a company is succeeding
in its mission of providing something people want—and doing so in a way
that uses resources efficiently relative to other possible uses. From this
perspective, the creation of shareholder value or profits is the measure,
and the reward, of success in delivering to society the goods and services
we desire, which is the more fundamental business objective. The measures
and rewards reflect the predominant values of the relevant society.
CEOs could point out that profits are not an end in themselves but a
signal from society that a company is providing things people want
By moving away from a rigid focus on the term shareholder value, big
business can also make clear to broad audiences that it understands the
trade-offs inherent in its social contract. The debate between business
and society is essentially one about how to manage (and reach agreement
on) those trade-offs. What might this point mean specifically? There is no
shortage of big social issues today that directly affect many big
businesses and require new debate. These issues include ensuring that aid
organizations and trade regimes successfully promote the development of
Africa and other poor regions, whose economic liftoff would present a
major potential boon to global markets as well as to international
security; promoting a more sophisticated and sensitive approach, by both
companies and governments, to balancing the societal risks and rewards
from new technologies; spearheading dialogue on the health care and
pension challenges in many developed countries; and supporting efforts to
resolve regional conflicts.
Obviously, the relevant issue must be matched to the specific business.
Some companies and business organizations have taken strong public stances
on these and similar issues. But in general, high-level, concerted
corporate activism is more notable by its absence. Business leaders
shouldn't fear taking a more forward role advocating the idea of a
contract between business and society. Public receptiveness to active
business leadership on issues such as these may be a lot greater than some
might be inclined to think. Despite the poor image and bad press of big
business in recent times, polls suggest that people retain a belief in its
ability to provide a positive contribution to society.
More than two centuries ago, Rousseau's social contract helped to seed the
idea among political leaders that they must serve the public good, lest
their own legitimacy be threatened. The CEOs of today's big corporations
should take the opportunity to restate and reinforce their own social
contracts in order to help secure, for the long term, the invested
billions of their shareholders.
About the Authors
Ian Davis is the worldwide managing director of McKinsey & Company. This
article was originally published as "The biggest contract" in the May 26,
2005, issue of the Economist. Copyright © The Economist Newspaper Limited,
London, 2005. All rights reserved. Reprinted by permission.

Quebec steps up wind power production: Quebec will account for about seven percent of current world production

Quebec steps up wind power production Last updated Jun 30 2005 09:21 AM
CBC News

A Quebec government project is designed to triple wind power production in
the province.
The government announced Wednesday a $3-billion plan to add 2,000
megawatts to the 1,000 megawatts now being developed.
Premier Jean Charest says the project will launch Quebec to the forefront
of wind power production.
Hydro-Québec President Thierry Vandal says once the new 2,000 megawatts
are installed, Quebec will account for about seven percent of current
world production.
The private sector will pay for most of the project, Vandal says.
"We are calling for tenders with private developers," Vandal explained at
a Wednesday press conference. "Alongside of that $3 billion, there will be
certain investments that Hydro-Québec is going to have to make in terms of
upgrading its grid and integrating the power and capacity on the grid."
Charest says the government wants to use the wind power project as a tool
for regional development.
"In the first 1,000 megawatts, there was a requirement that the
manufacturing be done ... in the region of the Bas-St-Laurent, Gaspésie
and Iles-de-la-Madeleine. We want to consolidate that region in regards to
its manufacturing," he says, noting Hydro-Québec will now decide what
percentage of the work will be done in those regions.
The government says the project will create 4,000 jobs during construction
and 200 permanent ones once its completed in 2013.

Africa: The Impact of Mobile Phones II

Africa: The Impact of Mobile Phones II
Submitted by Rob Katz on June 30, 2005 - 10:10. Telecommunications and IT
| The Policy Agenda
“The ultimate aim of policymakers must be to create the conditions for
private enterprise to make poverty history in Africa”

Vodafone is at it again – first, with their Social Impact of Mobile report
; now, CEO Arun Sarin has penned an op-ed in today’s Financial Times
(subscription required). As “make poverty history” rings out across the UK
and G8 in advance of next week’s summit, big business remains strangely
quiet. Not Vodafone. Sarin’s op-ed urges policymakers to learn from
African telecom’s success – principally, that demand-driven investments in
communications technology catalyze economic growth.

For the private sector to invest in Africa, Sarin continues, they must be
confident of the political, regulatory, and business environments – so he
asks donor governments to step up support for institutions and frameworks
that will support, not scare, private investors. He goes on to note the
importance of entrepreneurs:

“A thriving business sector, led by capable and highly motivated African
entrepreneurs, will lie at the heart of spurring economic growth and
reducing poverty.”

It’s about time a big-name CEO came out to discuss the link between
development and enterprise, and Sarin does a fantastic job in his op-ed.
At, we’ve been documenting how enabling regulatory
environments and vibrant entrepreneurship can spur economic growth. Kudos
to Sarin for speaking out on some of the same ideas. Coincidentally, he
also spoke at the "Eradicating Poverty Through Profit" conference last
year. Check out the video of his speech here.

Tsunami prompts companies to play greater role in humanitarian relief

Tsunami prompts companies to play greater role in humanitarian relief
Associated Press, 24 June 2005 - Mike Gray spends most days as
Rolls-Royce's regional director selling jet engines to the Indonesian
military or compression systems to oil companies across the country's vast
But ever since the December tsunami, the 54-year-old Briton with a boyish
face has assumed a new role: spurring corporate relief efforts.
Gray isn't alone. The Dec. 26 tsunami inspired unprecedented corporate
involvement in humanitarian relief after a natural disaster. Eager to
respond to the crisis - and bolster their credentials as good corporate
citizens - dozens of Fortune 500 companies joined aid groups on the ground
within weeks of the disaster that killed 176,000 people in 11 countries.
Days after the disaster, Gray chartered a 800-ton ferry to deliver masks,
body bags and gloves to the Indonesian military along the tsunami-ravaged
west coast of Sumatra - all at the company's expense.
He then approached the London-based bank HSBC Holdings with a proposal to
build a US$500,000 (euro400,000) clinic in the coastal town of Calang.
"When he said half a million dollars, I almost gasped," said Richard
McHowat, the bank's chief in Indonesia. "I said, 'Mike, we're going to
struggle to put that kind of money together."'
The state-of-the-art primary care clinic was completed nine weeks later.
Today, the compound with bright, white walls stands out against the tent
camps and wood shacks that dot Calang, which lost nearly 90 percent of its
7,000 residents in the Dec. 26 disaster. HSBC funded the clinic's
construction, Jakarta-based Global Assistance and Healthcare designed it,
and Rolls-Royce has agreed to pay operation costs for a year.
Examples of corporate relief work abound.
General Electric Co. shipped a water treatment plant to Aceh, while Intel
Corp. and several other companies are planning to wire the battered city
of Banda Aceh. Even an online casino got into the act by donating fishing
boats in Sri Lanka.
Those efforts, say corporations and their boosters, prove the private
sector can play a greater role in areas traditionally dominated by
governments and relief groups.
Businesses in the tsunami zones have demonstrated speed and efficiency as
well as technical expertise that aid groups sometimes lack in situations
like Aceh where villages, roads and bridges were destroyed.
"The ability to react quickly in any disaster situation, but particularly
in this one which is spread out over such a large geographical area, is
exceptionally important," said Erskine Bowles, former U.S. President Bill
Clinton's deputy in his role as special U.N. envoy for tsunami recovery.
"It shouldn't be viewed as competition, but as another resource that has
to be coordinated to be effectively used," he said.
The aid community appears divided over the prospect of ceding turf to
corporations. The United Nations has embraced the private sector as a
partner in the tsunami relief, but some aid groups say the job should be
left to experts.
They say too many companies are inexperienced and rush to finish a job,
leaving behind projects that are inappropriate or of little use to
In the Indonesian village of Lamreh, for example, a German cigar company
donated a water filtration system. But a dispute between the villagers
over the cost of the drinking water has left it sitting idle.
"It's all very well to come in quickly and build hard infrastructure,"
said Kim Tan, a spokesman for the British charity Oxfam.
"But it's not just about building schools and clinics," he said. "You have
to pay the teachers, the doctors. The history of aid is littered with
projects that didn't have long-term sustainability."
More than 400 U.S. companies gave US$528 million (euro430 million) for
tsunami relief, according to the U.S. Chamber of Commerce's Center for
Corporate Citizenship, and many of them were first-time givers to disaster
The numbers fall short of the more than US$721 million (euro590 million)
given by American companies after the Sept. 11 terrorist attacks, but
surpasses the previous record for a corporate response to a natural
disaster - US$70 million (euro57 million) for Hurricane Mitch in 1998.
The historic outpouring was driven both by the disaster's scope and its
occurrence over the Christmas holidays. But it also provided companies an
opportunity to burnish their image and build employee morale.
"We think this is good for business," said McHowat, whose bank also
donated money for six boats in Aceh and sent 30 employees to help rebuild
a school.
"People will make a decision where they buy their engines, where they
choose to bank and what shampoo they buy based on ethics and how this
company behaves," he said. "I've never heard a share holder say all this
activity is damaging profits and the share price."
Most companies gave cash to international aid agencies or governments,
giving them flexibility on spending it and the companies a tax write-off.
Others gave gifts in-kind - everything from powdered milk to backhoes to
But some companies took relief a step further, wanting in part to account
for donations especially in historically corrupt countries like Indonesia.
They sent employees into the disaster zone, teamed up with the United
Nations and local governments on training projects and started "Adopt a
Village" initiatives.
"This is the first time you are really seeing a surge in manpower," said
Alesandra Roccasalvo, the U.N. Development Program Business Partnership
specialist in Jakarta.
FedEx Corp. shipped 640 tons of medicine, supplies and water systems for
aid groups in the days after the tsunami, while accounting firms
PricewaterhouseCoopers and Deloitte & Touche are working with the U.N. to
protect tsunami donations.
General Electric considered donating water purification equipment to aid
groups, but gave up after they couldn't get a straight answer where it
would go in Aceh.
Instead, it flew a water treatment plant from Dubai to Singapore and then
shipped it by barge and then truck to Aceh. The company - along with CH2M
Hill - ran the plant until April and handed it to UNICEF which is
operating it with a local company.
Phillips Foods Inc., a Baltimore-based seafood company, said it donated 20
boats to fishermen in three countries.
"We are dealing with the fishermen every day," said Alex Thomas, managing
director of Philips Food India. "We felt this would be great opportunity
to participate in their sorrow and help them in any way we could."
Then there was Gray, the Rolls-Royce executive. At the request of the
British Embassy in Jakarta, he shipped masks and body bags and other
supplies to Aceh, using his business contacts to make it happen.
Gray's idea to build a clinic came after he realized many military field
hospitals would close. He said some aid groups dismissed his plans as
unrealistic, and medical aid groups refused to participate because he was
working with the military, who are fighting separatist rebels in the area.
But Gray makes no apologies, saying he couldn't have done the job without
help from the troops.
"We needed something that would transcend the emergency to permanent
rehabilitation and would become a focal point of the redevelopment of
Calang," he said.
Gray and McHowat's aid efforts may not be over.
Like two excited schoolboys, they sat in an airport waiting room last week
tossing around ideas. Maybe the clinic could be expanded into a hospital
or they could help the devastated fishing industry in Calang by providing
larger vessels.
"The tsunami has broken the mold," Gray said. "It provides us an
opportunity to see what we can do on the ground. We're just at the
On the Web:
- U.S. Chamber of Commerce:
- UNDP's Corporate Partnership in Emergencies at

Almost famous: Fair trade products are enjoying increased success. The French government’s plans to regulate the industry are meeting some opposition

Almost famous
Clare Goff in London
28 Jun 05

Fair trade products are enjoying increased success. The French
government’s plans to regulate the industry are meeting some opposition

Success breeds imitation, and imitation, to the French at least, calls for
regulation. As “Fairtrade” products begin to spawn copycat brands, the
French government is planning to standardise the industry.

Fairtrade goods in France are certified with the Max Havelaar label, which
is part of the umbrella organisation that sets international standards,
the Fairtrade Labelling Organisation (FLO). These standards ensure that
the product is sourced from a producer that has been inspected and
certified against international fair trade standards, and that a price is
paid for the product that covers the cost of sustainable production and
living, as well as a premium that can be invested in development.

Products go through a rigorous and complex testing process before being
awarded the mark. While still a niche market in the country – in 2003,
sales in Fairtrade items were just €37 million, compared with £100
million in the UK – 60% of consumers in France claim to be aware of the
concept of fair trade and sales of products bearing the Max Havelaar mark
are on the increase.

But as Fairtrade goods move into the mainstream many consumers have become
confused by a plethora of “fairly traded” products on their supermarket

A number of private schemes have entered the marketplace in recent years
that claim to be fairly traded but do not meet the certification standards
of the FLO. They pay producers more than the often low global commodity
prices but do not have any of the associated initiatives – such as a
commitment to sustainable development within producer communities – set
out by the FLO.

In particular the introduction of non-food items claiming to be fairly
traded has brought confusion to the burgeoning movement, according to
Antoine Herth, MP for the Bas-Rhin department of eastern France, who has
written a report on which he hopes a programme of regulation for the
industry will be based.

Barriers to entry will be lowered

Herth’s report does not suggest replacing the current standards but
attempts to qualify and define fairly traded products to avoid consumer

A commission is about to get under way to decide a catch-all definition
for fair trade and a system of legislation is expected to be put in place
by 2006.

But the proposals have led to clashes between the government and Fairtrade
organisations, who say any attempt at regulation will inevitably lower the
barriers of entry and dilute the movement’s rigorous standards into a weak
set of norms.

The process to create normalisation in France across the industry for
fairly traded goods began three years ago when the newly created position
of secretary of state for economic solidarity developed an interest in
fair trade and, since then, an ongoing battle has pitted the historic
Fairtrade organisations against retailers and consumer groups.

For Max Havelaar in France the danger is that the Fairtrade system will be
diluted to little more than a contractual relationship between a buyer and

“It’s not just about certification but integrating all aspects,” says
Simon Pare, president of FLO certification at Max Havelaar. “It’s about
awareness-raising and lobbying and producer support.”

Fairtrade organisations are participating in the French government’s
attempt to come up with a definition but say their own monitoring and
labelling systems are so complex that a regulatory scheme would inevitably
be a watered down version.

While not wanting a monopoly on the market for fairly traded goods, Max
Havelaar is keen to ensure that the spirit of Fairtrade and the
combination of its different needs be respected in any moves towards

Flourishing through consumer support

The Fairtrade movement began in the late 1940s when churches in North
America and Europe began selling the handicrafts of refugees to northern
markets. In 1988 Max Havelaar – the first Fairtrade initiative – launched
in Holland, and the voluntary movement now operates in 19 countries under
the FLO mark.

In the UK the Fairtrade Foundation is backed by a number of development
charities, and a recent Mori poll found that half of all adults in the UK
now recognise the Fairtrade mark, up from a quarter just two years ago,
and awareness is spreading across all social groupings.

Fairtrade organisations say the power of the mark is that it is a
social-based movement that is separate from the companies making the
products. It has been pushed by, and has the confidence of, consumers.

While encouraging state support, Fairtrade organisations would prefer as
little state intervention as possible, and have, until recently,
encountered broad acceptance of the voluntary structure.

But France is a highly regulated society where private initiatives are
often viewed with suspicion.

There have been some cases in France of brands, and in particular
supermarkets, trying to cash in on the trend for fairly traded goods
without meeting international standards set out by Fairtrade. These have
so far been “dealt with” by the FLO, which claims that cases of
non-certified products are isolated.

Belgium is the only other European market to attempt regulation of
ethically produced goods. Its government introduced a social label telling
shoppers that a product has been produced to standards set out by the
International Labour Organisation after a number of ethically labelled
products tried to cash in on the interest in ethical shopping.

As the market for both ethical and fairly traded goods widens, imitators
will inevitably increase. Indeed, some non-certified “fair trade”
companies claim to operate in the spaces that the FLO’s strict criteria
don’t reach.

More transparency will be necessary

Fairtrade organisations recognise that with the increased success of their
products there will be calls for greater transparency and a broader
system. They are aware that a decision will have to be made on how to
protect and ensure recognition of the mark.

But as the phoney war between the French government and the French
Fairtrade movement continues as they move towards a definition of fair
trade, the French government is taking it one step further.

It has taken the call for more regulation to be embedded in the fair trade
industry to the European Union, in a bid to get a Europe-wide framework.

It has met opposition from the global fair trade umbrella organisation
Fine, which incorporates the four international Fairtrade movements. Fine
would like political recognition of fair trade rather than a legally
defined framework for fairly traded goods.

The move towards regulation of the fair trade industry, at both country
and European level, is viewed as an attempt by governments to show support
of its initiatives. But campaigners hope that any governments keen to get
involved in fair trade will become part of the wider debate that Fairtrade

“No arrangements for fair trade should be distanced from the fact that
southern farmers need better access to markets,” says Pare.

Power vacuum: Corporate governance methodologies are falling short, they should become more sophisticated

Power vacuum
EC Newsdesk
27 Jun 05

Corporate governance methodologies are falling short, they should become
more sophisticated
It’s becoming more common these days for global ratings agencies and
research houses to churn out league tables on corporate governance. These
rankings often cover such matters as directorial independence or committee
structures. Well and good, but they are generally obsessed with that which
can be measured or “metricated” to use the jargon. But assessing
governance should not be just about what’s countable, it should be about
what counts. Increasingly, that means broadening the governance landscape.

The latest high-profile ranking table has been released by the FTSE Group
in the UK in collaboration with Institutional Shareholder Services, the US
corporate governance researchers. Top rankers on their table include BHP
Billiton, BT Group, Scottish Power and O2.

These companies may indeed be fine examples of best practice corporate
governance, within the parameters of the methodology used. But we would
argue that the methodology falls short of the contemporary understanding
of what constitutes good governance.

The stakeholder quotient

In February, ISS itself produced a white paper focusing on the importance
of communication in developing solid governance programmes. The paper
talks up the value of corporate interaction, but the bottom line of the
report is disappointingly narrow. The point of all these cutting edge
communication strategies for modern corporations is, we are told, about
“fostering positive interaction with their most powerful stakeholder –
their shareholders”.
Are there other stakeholders that don’t hold shares? Seems a banal
question but many of those producing and reading governance ratings
reports seem to believe there aren’t, ISS and FTSE included.

If market value and nothing else (beyond legal compliance) is to be
pursued, as experts such as Milton Friedman argue, risk factors must be
clearly understood and, in the interests of good governance, should be
communicated. Risk factors increasingly include such issues as
environmental management and human rights, areas where non-shareholding
stakeholders are likely to be either legitimate or de facto monitors and

If company decision-making does not factor in considerations of these
issues and groups, it is setting itself up for a crash. Let’s not forget
that Shell was brought to the brink of disaster twice in recent memory,
once by a non-owner environmental group, Greenpeace, over the Brent Spar
incident in 1984, and second by a non-shareholding community of
disgruntled villagers in Nigeria in the late 1990s.

That company has since changed its whole approach to stakeholder

A broader view

Why then aren’t the means by which corporate boards and management
interact with these groups, the extent to which they understand their
concerns, their successes and failures in dealing with them, and the
mechanisms they use all part of the overall governance mix? Surely such
factors are as vital to the company’s well-being and, yes, market value
and potential as any other traditional governance element.

Perhaps they are ignored because they are seen to be more difficult to
metricate stakeholder views. More difficult, maybe, but not impossible. A
simple questionnaire would suffice to give an indication of stakeholder
tie-ins on company decisions. For instance:

- Does your company have regular discussions/meetings with leading
non-shareholder stakeholders?

- If so, how often do you meet, on average, on an annual basis?

- How many stakeholders (groups or individuals) are included in these

This would already put us on the way to devising a workable methodology to
incorporate non-owner stakeholder relations. More sophisticated ones must
surely exist.

There may therefore be an excuse, but apparently no good reason.

A wider definition that encapsulates the role of the non-shareholding
stakeholder in modern corporate governance culture is clearly needed.
Governance ranking methodology designers that fail in this area are
letting themselves and, more importantly, their readers, down.