According to a new study from the United Nations Conference on Trade and Development, 29 of the world’s largest economies are corporations. This means, Unctad says, that Nigeria’s 100 mn plus people annually generate less wealth than DaimlerChrysler and Chile’s output is comparable to Exxon Mobil’s. Contrast this with the fact that some 60 countries got poorer over the last decade, and it’s clear that big companies are in a powerful position.
But does this profitability go hand in hand with responsibility? With all the recent attention paid to corporate social responsibility (CSR) and socially responsible investment (SRI), on the surface it would appear so. But behind the glossy brochures and catchy slogans, what are the reasons for companies to implement CSR practices? Is it just for their own image and reputation? And if investors start to lose interest, will companies stop bothering?
Richard Samans, director of global issues and associate member of the World Economic Forum’s board, highlights one of the main reasons why companies are interested in CSR: the business case. ‘CSR usually has a positive effect on the financial bottom line, if not directly and in the short term, then more indirectly and in the longer term,’ he says.
According to Samans, a direct benefit of CSR can be cost savings resulting from a change to a less energy-consuming and more environmentally-friendly production process. Indirect benefits can include a positive impact on brand and company reputation as well as employee motivation.
‘Another increasingly important business driver for CSR is the investment community,’ Samans notes. ‘Although still small relative to the total amount invested, the capital flow into responsible investment funds is increasing, and certain CSR-related criteria are making their way into mainstream investment decisions.’ As he says, sustainability indexes like FTSE4Good or the DJ Stoxx Sustainability indexes, are the most tangible evidence of these developments.
Of course, the last year’s corporate scandals have slowed the CSR momentum that was building in 2000 and 2001. NFO WorldGroup produces a corporate opinion, reputation and equity index (Core). Measuring investor views of characteristics like reputation, fair and ethical business practices, trust and confidence, the Core index for the Dow 30 companies dropped 16 percent in 2002 – coincidentally the same as the average loss in share value.
Lip service
John Elkington, chairman of SustainAbility, a leading sustainable development consultancy, highlights this debate over the validity of the business reasons for CSR: ‘There’s a battle going on between those who are trying to develop and communicate the business case, and those who are saying we shouldn’t have to prove the business case; if it’s right, we should do it – we don’t always need to be rewarded for these things.’
In Elkington’s opinion, the majority of companies approach CSR thinking about what they can gain. ‘Many companies think if they can get away with the minimum and still build their reputation, then so much the better,’ he says.
Steve Hilton, founding partner of CSR consultancy Good Business, agrees, adding that most companies just pay lip service to CSR and it is often only after some kind of shock that they pay full attention to it. ‘Shell openly acknowledged that it was the twin issues of the Brent Spar disaster and the execution of Ken Saro-Wiwa [both in 1995] that prompted them to take a look at the whole CSR agenda and to take it on board,’ he says.
Hilton believes that looking for a business reason for CSR is a mistake. ‘There’s a lot of bogus business case rhetoric in the whole CSR debate,’ he says. ‘And I’m not convinced that companies should expect a business benefit from CSR – it’s like saying you should be rewarded commercially for not behaving badly.’
But if the end result is beneficial for society, do the motivations – however self-serving – really matter? Craig Bennett, corporate accountability campaigner at Friends of the Earth, says that what’s important is be honest about your motivation. ‘You can spot very quickly whether a company and its directors are genuine about wanting to improve their socio-environmental performance, or whether they’re doing it purely to improve the company’s image,’ he says.
Elkington adds, ‘A company’s own employees will see the reality. Also, NGOs are well connected to employees, and are increasingly well connected to SRI funds who are doing all the benchmarking. What companies do or don’t do is much more transparent.’
Consumer interest
But aside from the investment case, or lack thereof, what about other stakeholders? A 2001 Mori poll showed that consumer interest in CSR had grown dramatically. It asked, ‘When forming a decision about a product or service from a particular company or organization, how important is it to you that it shows a high degree of social responsibility?’ Almost 90 percent answered very or fairly, a 15 percent increase since 1998.
Chris Tuppen, head of sustainable development and corporate accountability at BT Group, says the company’s own research verifies this increase in stakeholder interest. ‘Ultimately, if we stopped all of our CSR activities, our satisfaction figures would go down by 10 percent. That would have a much more damaging effect than a 10 percent reduction of turnover.’
When asked what would happen if stakeholder interest in CSR fell consistently over the next ten years, he comments, ‘If all of the interest disappeared then that would have an effect on BT’s CSR activities. But,’ he adds, ‘there’s no indication that’s going to happen and every indication that it will be the reverse.’
Samans from the World Economic Forum also looks to the future: ‘If there was no pressure from NGOs, no requests from investors or no support from a dedicated board, the case for CSR would be harder to make, and it is likely that fewer companies would engage in CSR,’ he says. ‘Some companies would probably still engage because of their particular culture, tradition or leadership rather than the effect on their bottom line. However, their approach to CSR would most likely be less formalized and more an add-on to the company’s activities.’
With corporate cynicism like this, some argue that for CSR to be widely and permanently adopted, it has to become less dependent on the bottom line and on investor interest. As Hilton says, ‘We need to move away from the simplistic business case arguments and add to it some moral arguments. It is clear there are commercial risks associated with social and environmental impacts, and that there is a business case for minimizing them, but it’s quite a difficult one to specify because it’s removing future problems. You can’t actually point to the bottom line benefit.’
Charity case
But without a clear profit-generating benefit, should companies even be concerned with CSR? Is their only responsibility to produce returns for shareholders? ‘Whether companies should bother about CSR is a complex philosophical question,’ maintains Samans. ‘From the WEF’s perspective, we would argue that companies do have a responsibility to society. There is a certain set of minimum standards that companies should comply with. As for further responsibilities, each company needs to define its own position.’
Healthcare company Novo Nordisk has defined its further responsibilities by focusing on one area of expertise: diabetes. As Peter Haahr, vice president and head of investor relations, explains, ‘At the AGM in 2001, shareholders were asked how they would feel about the company setting aside Dkr500 mn ($75 mn) to fund the World Diabetes Foundation, whose aim is to educate people in places like India and Tanzania about diabetes. The shareholders backed the idea, yet if this does benefit the company, it will not be for many, many years.’
Haahr explains this more philanthropic view of CSR: ‘As a company, you’re part of society; you need to take responsibility and give something back. But you must think about the framework in which you do this. The extreme is just giving money away – but that isn’t sustainable for business or for society. There has to be a balance between your social responsibility and your commitment to your business.’
Other companies accept they have their own interests at heart and are open about it. At a recent Conference Board conference on CSR, a Coca-Cola spokesperson acknowledged that the company spends money on Aids prevention in Africa because it doesn’t want its employees and consumers there to die. He asserted firmly that Coke is a business, not a charity. ‘If we had a competitor who was taking away 10 percent of our revenue, we would throw money at fighting it. In this case, Aids is our competitor,’ the spokesperson announced.
‘That honesty and candor is very welcome in the CSR debate,’ comments SustainAbility’s Elkington. ‘It’s important to own up and say this problem has significant implications for the business, so this is a strategic investment for the company. It’s saying this is the challenge, these are our actions. That is legitimate and helpful.’
What lies beneath
CSR should not be an afterthought, nor something to boast about. It should just become the norm. As Bennett argues, ‘The fact that we’re still having debates about the business case for CSR shows what an embryonic stage we’re at on these issues. Nobody has to argue the business case for health and safety issues any more. But the ongoing debate about socio-environmental issues shows that it’s still in its infancy, and business still sees it as an optional bolt-on.’
The consensus is that CSR doesn’t have to be seen as something separate from profit-making; it should be part of the same process. As noted by Gero Fröhlich, IRO at Volkswagen, ‘If we don’t generate profits, how can we do things better – developing engines with less consumption and less pollution? We have to be concerned overall with making profits, but nevertheless we should never separate that and CSR. What we have to do is find a way of doing business that is best for all sides.’
This means a commitment to CSR that goes beyond the surface level – high-profile campaigns, and big budget brochures, sure, but also a genuine commitment to change. The concern is that glossy CSR proclamations could be little more than ‘greenwash’, masking dirty business practices.
As Elkington says, ‘Sometimes a company produces a glossy CSR or sustainability report, but you very often find that same company pushing behind the scenes for very different outcomes than you might assume. The public is very skeptical about that.’
This highlights a paradox: the skeptical public wants honesty from companies, but then complains about using CSR for purposes of self-promotion. BT’s Tuppen illustrates the problem: ‘One of the things I often get asked by stakeholders is, Surely CSR is all spin? You’re only doing it for your own reputation and image. Then we explain all of the things we do and they say, Well why don’t you tell us about these things?’
The solution, according to Steve Hilton at Good Business, is to be open with stakeholders, but not to expect rewards for merely behaving like a good corporate citizen. ‘When companies talk about the good things they’re doing, when they’re just meeting expectations, people think, Well you should be doing that anyway, so why are you telling us? That’s when CSR comes across as superficial PR. But when companies are going beyond expectations and using their business to achieve social and environmental progress, then stakeholders really do want to hear about it.’
Hilton has confidence in the public’s business acumen: ‘They understand that companies are not there to save the world but to deliver returns,’ he says. ‘But they have to do it in a way that delivers a social benefit too. What the public doesn’t accept is the pretence from companies that they’re only doing things for philanthropic or altruistic reasons, because people understand that’s not the job of companies, that they’re not charities.’
Hilton stresses that business has to be sophisticated about how it delivers these messages: ‘Our advice is you shouldn’t communicate it, you should just do it, and get people involved.’
Ultimately, instead of waving the CSR flag from the rooftops, companies should concentrate on ensuring their social and economic foundations are secure. When it comes to CSR, it’s your company’s choice whether to be a charitable institution or to commit to taking care of the bottom line; whether you work to benefit society at large or just shareholders. But whatever the choice, it’s clear that honesty is the best policy, just as your parents always said.
