MHCi Monthly Feature: February 2014

 

Will Doing Good Through Legalising CSR in India Actually Do Bad?

 

Dr. Michael Hopkins, CEO, MHC International Ltd

Will doing good through CSR in India do a lot of bad?

Stepping off the plane to receive a CSR award in Delhi last week, I was unhappy with the new CSR law passed by the Indian Parliament in August, 2013 that will come into effect for the largest companies as of April 2014.  If it looks like a tax, smells like a tax, legislates like a tax…then isn’t it a tax?

It is not clear exactly how the new law will influence companies but it is important to note that it shows that CSR has moved out of the mainly academic and business area, as in the past, but now into Government responsibility. 

India is not alone and other countries, such as Mauritius and Denmark, have worked on legal frameworks.  India insists that its framework is essentially voluntary, while Mauritius has insisted on 1% of company profits to be allocated to ‘CSR projects’.  Companies have, unsurprisingly, reacted in Mauritius negatively against such a law and are reluctant to pursue CSR activities even though they are beneficial to them.

The India law requires companies with a net worth of over Rs 500 crore ($US80million), turnover of over Rs 1,000 crore ($US160million), or net profit of more than Rs 5 crore ($0.8mn), to spend at least 2 per cent of the average net profit in the immediate three preceding years on CSR activity.  However, it isn’t mandatory, and apparently boards of the companies will only have to report how much they spent on CSR and explain why they couldn’t meet the commitment. The government will not, it seems, even ask them to amplify on that explanation.

Another main provision, and seemingly to come closer to the systems multi-stakeholder model of CSR model that I favour, is that Companies will have to set up a Corporate Social Responsibility (CSR) committee at the board level that must be headed by an independent director on the board. The committee will frame a CSR policy for the company or group and recommend expenditure on various projects. It will also monitor the CSR policy of the company from time to time.

The company will have to provide information on their CSR policy and the attendant spending on the website and in the directors’ report, putting all the relevant information in the public domain that can be accessed by the company’s shareholder, the media and social activists.

The idea is not to regulate too much which is why the entire principle of CSR has been encapsulated in just one section – section 135 of the Companies Act 2013 – with five sub-sections. It is expected that there won’t be more than 12 to 14 rules that are currently under formulation.

The Act encourages companies to spend at least 2% of their average net profit in the previous three years on CSR activities. The ministry’s draft rules, that have been put  up for public comment, define net profit as the profit before tax as per the books of accounts, excluding profits arising from branches outside India. The Act lists out a set of activities eligible under CSR. Companies may implement these activities taking into account the local conditions after seeking board approval. The indicative activities which can be undertaken by a company under CSR have been specified under Schedule VII of the Act.

One provision that goes against the tenets of muti-stakeholder CSR is that activities meant exclusively for employees and their families will not qualify.

After listening to dignitaries at the CSR conference organized by Dr. Tripathi at the University of Delhi in Feb 2014 presenting this author with a CSR lifetime achievement award, my view changed.  The Government law has actually raised the profile of CSR substantially in India and could well lead to the systematic multi-stakeholder model favoured around the world.  The tax is cloaked as a voluntary contribution for large companies.  But this wolf could actually turn not only into a sheep but into a new profit centre for corporations.  Watch out for my future contributions on these points as the law may actually turn out to be a Trojan Horse that will eventually benefit both society and companies themselves.

PS Our next Certified CSR Workshop in India on the implications of the new law will take place in Mumbai, 21-22 October 2014 - more details and register here. And, as one of our CSRFI participants noted last week:

'It was indeed a great pleasure to have attended the CSR Seminar in Mumbai last week and to have you as a key speaker - giving us an eye opening, exhilarating and an enthralling presentation. I would definitely like to seek an opportunity and would look forward to attend another one of your presentations in the near future.  I must say that your website is a plethora of knowledge.'

 

MHCi view of CSR & Sustainability in 2013

 Michael Hopkins and Adrian Payne[1]

CSR Experts, National Liberal Club, London, Jan 7 2013

 Preface

MHC International Ltd's (MHCi) sixth annual update took place in Central London with invited experts drawn from the business, academic and NGO world.  This beginning of the year, invitation only event is designed to keep MHCi's work on the cutting edge of CSR and Sustainability issues to ensure that our research, advisory services and executive programmes are as up-to-date as possible.

Introduction

This year’s sixth MHCi annual CSR & Sustainability Update expert group meeting, with a range of CSR practitioners and commentators, once again looked at the prospects for CSR in the coming year in the context of changing trends and themes in the corporate, social, political and economic spheres.  MHCi uses these face-to-face intense discussions for its advisory services to companies and governments, and as an input into its executive programmes[2].

What did we say in 2012 and were we right?

The Table above shows the two author’s assessment of our ‘predictions’ on a scale of 1 to 10, with 10 meaning totally accurate and 1 totally inaccurate.  The main conclusion is that we were not far from what happened with a minor surprise being that trust did decline for companies e.g. Apple, but not their brands and products e.g. i-phones.  A bigger surprise appears to be the rise of CSR as an oft-quoted term and a focus more on a comprehensive multi-stakeholder approach focusing upon social, financial and economic issues than environment and climate change.  In fact its popularity led some (Pamela Ravaiso in particular) to see CSR being ‘watered down’.  For instance if everything and anything is termed as ‘CSR’ such as the implementation of new machinery needed to keep up productivity is then termed CSR because a side effect is using less energy, then this is stretching the concept somewhat.  Or a company declaring staff evaluations as CSR when in fact they are required by most EU law, or even a company claiming that non-paid (graduate level) interns are part of their ‘community development’.

Black Swan events[1]

Some (Mallen Baker in particular in a written comment) noted that all the points on the rating slide were progressive shifts. They don't happen over night and are hence easy to guess with relative accuracy over the upcoming 12, or even 24 months.  He challenged us to think about more sudden shifts, which could not possibly foreseen as easily – written about in Nicholas Taleb’s book on Black Swans.  In a political context, the Arab Spring could be such an example.

He noted that the most important and enduring changes often come about by more significant step changes, the causes of which are all familiar but the outcomes of which people never rank highly enough as a priority until after the event.  For instance, we knew that the financial system was under increasing stress for a number of years but we still managed to be surprised when the outcome came - and more importantly we only seem to react when catastrophe strikes.

Mallen continued that we have a number of growing stress factors around us at the moment, and logically we will see change that is not purely incremental as a result. We may not be able to predict with accuracy specific consequences, but we should be able to consider what are potential change points, and how might they be influenced.  So, for instance, more extreme climate events that shock people into greater urgency.  At what point might that lead business actors to get more actively engaged in the current polarisation of US politics on climate issues - and what would be the positive and negative outcomes of that?   Because surely the growing evidence of damage worldwide and the current US policy paralysis is one of those stress points where something has to give.  It doesn't, of course, have to give in the useful, constructive way that we would like.  As a species, it is perfectly possible we go over the edge into the abyss pointing fingers and blaming each other all the way to extinction.  But the purpose of looking ahead and making predictions must surely be to make us more prepared to seek the outcomes that are more desirable, and to avoid the worst effects of those that are not.


[1] A black swan is an event, positive or negative, that is deemed improbable yet causes massive consequences, see Nicholas Taleb ‘The Black Swan’ [Random House, 2010)

 

What do we think for 2013?

Trust in companies may stabilise while trust in brands will continue to remain relatively stable. In this regard, the mainstream media was very willing to slate companies for bad behaviour, but rarely did it praise companies for good behaviour. Part of the reason for this was maybe that good news on the sustainability front (i.e. lower carbon emissions) was much more nuanced than child labour in factories and seen as a lot less emotive. 

Trust in politicians will continue to evaporate - for example, in the UK, few of the electorate think MPs represent their interest as opposed to blindly supporting party politics. Some thought that this was due to MPs being paid too little (UK), others drew a contrast to the situation in other countries (e.g. Switzerland) where civic duty seemed to come first.  In the USA trust in congress has neared rock-bottom and is likely to stay that way for some time to come. 

The issue of trust will continue to spark a lot of discussion around banks, and our take on this was where do you draw the line between everyday competitive business practices and illegal behaviour.  Rather than directly criticise banks, would be better to lobby Governments to make the rules clear. Same as for tax since there is a fine balance between progressive taxation where the rich pay a little more and punitive taxes that destroy enterprise - we saw the cover of the latest Private Eye, on which Santa is lambasted for being a tax exile!  President Hollande in France has certainly gone too far with 75% marginal taxes on the rich with rigidities in the labour market un-examined.

CSR will continue to evolve although not necessarily in a structured way. Some opinion formers had moved the argument on from 'Sustainable Capitalism' to 'Breakthrough Capitalism' or even ‘Conscious Capitalism’.  However it wasn't immediately clear whateither would actually mean in practice. 

Social Media may well end up being a 'two-edged sword'.  Clearly this communication channel was becoming increasingly important (as was predicted last year), but companies CSR credentials could be enhanced or degraded at a whim. A key question here was how could companies best gear themselves up to make use of social media themselves.  Our group was divided on this and not on age grounds!

Companies will not cut back in CSR activities despite the current recession and times of austerity simply because companies now see CSR as a strategic business model essential for their business.  However it might mean that there would be cutbacks in funding for Green Issues as the seriousness of this issue had (in the public eye at least) diminished over recent years. Not helped by the relative lack of progress at Rio + 20.  On the other hand it was suggested that investing in Green issues could be a key focus for pulling countries out of recession.

The current wave of austerity, job loss and social unrest could stimulate Companies to consider changing their business models to adapt not only to changing social expectations of companies (e.g. executive pay and benefits) but also a leaner money supply.  Companies are likely to play a more pro-active role in pulling countries out of recession - transformative CSR as it were.  In the US, businesses may step in to solve the current intransigence (policy vacuum) on budget issues as without some agreement it was very difficult for companies to plan their investment programmes.

Although still at a slow burn, there was evidence that more women were assuming positions of power, not only in companies, but also in politics.

Taxation of big companies will continue to be an issue as even big national companies (e.g. Whitbread's Costa) are facing an unfair tax situation in so far as multinationals have the footprint that enables them to pay far less tax than Whitbread. And 'tax minimalists', for want of a better phrase, are getting it in the neck in part because governments desperately need the tax revenue, not so much to bail out banks but to prop up wholly unsustainable public sectors.

Certification/'fair trade' and 'organic' will continue but are starting to be confused/blended with other criteria such as food miles – a fairly hopeless approach given the CO2 footprint of greenhouses needed to produce 'local food'.  SA8000 certification of Pakistan and Bangladesh companies that then burned down with the loss of many lives will continue the re-think process.

Ecosystem services will continue to establish as a robust and popular concept in NGO and scientific circles, partly because it is a good way to think about the benefits of the environment.  However, making them mainstream will make the CSR community having to convince the public to get used to the idea that they should pay for such services.

Concluding remark

Finally, CSR in business will continue to mean much more than simply moral sustainability whereby moral sustainability is basically 'you leave the world in a better state than you found it'. Companies are more and more convinced that the path to profit can embrace social and environmental development linked to product innovation. One would hope that this corporate aspiration will be taken on board by Governments and NGOs in terms of a more objective assessment by these sectors of the potential value of partnerships to accelerate and bring about real change in the business environment to the benefit of all stakeholders. 



[1]Our meeting took place in London on Jan 7th and, as well as the two authors, consisted of Mallen Baker, John Cole, Adrian Henriques, Thomas Osburg, Pamela Ravasio, Julian Roche,  Bart Slob, Katherine Sykes, Alan Stainer, Lorice Stainer while Martin Summers kindly contributed his own thoughts in absentia.

[2]On the former see www.mhcinternational.com and on Executive Education see www.csrfi.com and www.corporateresponsibility.ch

MHCi view of CSR & Sustainability in 2012

 Michael Hopkins, Adrian Payne and Martin Summers[1]

 Preface

MHC International Ltd's (MHCi) sixth annual update took place in Central London with invited experts drawn from the business, academic and NGO world.  This beginning of the year, invitation only, event is designed to keep MHCi's work on the cutting edge of CSR and Sustainability issues to ensure that our research, advisory services and executive programmes are as up-to-date as possible.

Introduction

This year’s sixth MHCi annual CSR & Sustainability Update expert group meeting, with a range of CSR practitioners and commentators, once again looked at the prospects for CSR in the coming year in the context of changing trends and themes in the corporate, social, political and economic spheres.  MHCi uses these face-to-face intense discussions for its advisory services to companies and governments, and as an input into its executive programmes[2].

Summary of prospects for CSR in 2012

1.       The decline of trust in brands, companies and sectors continues[3].

This should however be seen in a positive light as it creates:
a)  opportunities for more open, honest and direct debate between consumers and companies, governments and other stakeholders about the key issues and future for certain sectors.
b) opportunities for greater competitive advantage for those companies that do manage to build ‘trust relationships’ with consumers and other stakeholders. While Steve Jobs exemplified how charismatic leadership can help build brand trust, the top 10 most trustworthy brands in the US illustrates that brand trust can be built via a CSR programme that is embedded throughout the business[4].

2.       Trust in governments has also declined.

This has led to greater scepticism about the ability and inclination of governments to tackle key sustainability and other issues decisively and comprehensively, as indicated by widespread protests in the crisis-hit Eurozone and in opinion polls about government’s ability to deliver on jobs, growth and climate change, etc. Against such a background the Rio+20 Earth Summit arguably holds little promise for delivering significant change.

3.       CSR is going through another period of redefining and broadening.

A few years ago it looked as if CSR would become more tightly defined around ‘corporate responsibility’ (getting the basics of company responsibility right) and ‘sustainability’ (focusing on the key long term material issues for a company and its stakeholders). But the extent of the financial crisis and its social impacts mean that there is renewed emphasis on financial and government responsibility, and an increased scope for responsible capitalism.

The terms of the CSR debate have also been given an impetus by Porter and Kramer’s Harvard Business Review article on ‘Shared Value’[5] and wider discussions about what some have called ‘sustainable capitalism’[6] (often used in contrast to ‘casino capitalism’.) Although this debate is in flux, and covers many topics, the need to rethink financial markets and the link between executive remuneration and performance[7] are common themes.

4.       The demand for greater transparency, disclosure and non-financial reporting continues to increase.

There have been several very important developments in reporting: ISO 26000; the growing interest in integrated reporting[8]; the development of GRI4[9] (GRI’s next generation of guidelines); the revised OECD multi-national guidelines[10] and the EU’s push for a wider social responsibility concept and more social and environmental reporting in its 2011-2014 CSR strategy. The number of companies reporting on sustainability is also increasing: KPMG research shows 95% of the world’s 250 biggest companies now report on their sustainability performance, up from 80% in 2008
[11].

Some seminar participants did however ask whether too much reliance is being placed on reporting as a tool to drive and monitor corporate change, given that one of the lessons of the financial crisis is that accounts (commercial and governmental) cannot be trusted to give an accurate picture of, or to be, a good guide to future developments.

5.       Social media has shown its ability to drive major political change but its potential as an agent of change for sustainability and in driving company change is yet to be established.

While social media has clearly played a major role in the Arab Spring and in political protests in the Eurozone, and has proved invaluable to many companies in building relationships with consumers, it is not at all clear how important it has been, nor can be, in putting pressure on companies to change their practices from a CSR perspective. The combination of a vibrant civil society, dynamic mainstream media, and a critical populace still seems to be one of the best ways of keeping companies alert and responsive to changing social trends and demands. However, social media could perhaps play a role in coordinating (and thus increasing) shareholder activism.


[1] Martin is an Associate, The Helical Group

[2]On the former see www.mhcinternational.com and on exec education see www.corporateresponsibility.ch

[3]See the significant downward trends for many sectors in the annual Harris poll showing how they are perceived to serve their consumers http://www.harrisinteractive.com/NewsRoom/HarrisPolls/tabid/447/mid/1508/articleId/867/ctl/ReadCustom%20Default/Default.aspx

[6]See, for example, Al Gore’s article A Manifesto for Sustainable Capitalism.http://online.wsj.com/article/SB10001424052970203430404577092682864215896.html or this article by the CEO of Kingfisher http://www.guardian.co.uk/sustainable-business/blog/kingfisher-ceo-ian-cheshire-sustainable-capitalism

[8]See, for example, Integrated Reporting’s important paper http://www.theiirc.org/the-integrated-reporting-discussion-paper/

[10] http://www.oecd.org/document/28/0,3746,en_2649_34889_2397532_1_1_1_1,00.html

MHCi Monthly Feature: May 2012

Socially Responsible Investment or Corporate Social Responsibility

Socially Responsible Investment and Corporate Social Responsibility –  two halves of the same coin, or quite different currencies?

Julian Roche, VP, MHC International Ltd

Introduction

Within the ‘CSR world’ it is almost taken as axiomatic that there is no contradiction between Socially Responsible Investment (SRI) and Corporate Social Responsibility (CSR)[1].  The vision is this.  Investors will act responsibly looking at responsible and impact investment to make their money count for a better world as well as just obtain a financial return.  Meanwhile enlightened companies will recognise that an increasing number of investors will look at not just their raw financial numbers but also their CSR engagement and scores, and act to improve their CSR performance to attract more investment and lower their cost of capital.  There is already suggested evidence[2] that companies are able to attract investment less expensively if they perform well in certain CSR indicators.  A virtuous circle is almost inevitable, as progressively more investment is directed on a socially responsible basis and the pressure on companies to perform better in CSR mounts accordingly.

SRI and CSR poorly aligned with each other?

But what if this cheerful vision was not in fact true?  What would happen if, in fact, SRI and CSR were actually poorly aligned with one another, and even potentially in conflict?  But how could this possibly be?  Surely they not only sit well together, but are almost two halves of the same coin?

Let us start with Environmental, Social and Governance screening.  To see how this might conflict with CSR we need to look to another discipline, that of organisational theory.  On the whole CSR practitioners and indeed theorists are not dreadfully inclined to look at mundane concepts like the alignment of incentives and conflicts of interest within organisations, but perhaps they ought to.  What will be the consequence for corporate managers of pressure from SRI investors?  It will be to conform to the implicit instructions that they have been issued – not to innovate, or drive forward CSR initiatives themselves.  A strong parallel could be drawn with accounting procedures, to which IRIS[3] and other SRI initiatives are already fast approaching.

Another parallel can be drawn with zakat, the charitable wealth tax of the Muslim world.  It’s compulsory in Saudi Arabia, so accountants are employed to ensure it is kept to a minimum.  What started as a religious duty to perform has now widely become, unfortunately, a business duty to avoid.  If these parallels hold, within a matter of a few years, we could well be looking at institutionalised SRI accounting procedures – such is the goal to which IRIS really must be directed if is to transcend its current muddled mass of multiple indicators without weightings or any mandatory application. One longstanding advocate of corporate governance looks forward to this with enthusiasm: ‘The only way to deal with ESG is through immediate, rigorous and disciplined amendment of the global accounting system’[4].  If this were to happen, an SRI world might largely reduce CSR to conformity with the requirements of institutional and retail investors.  CSR as an innovative, management-driven discipline at the cutting edge would be dead and buried. Its replacement would be a massive system of management accounts which ensures compliance[5]. Supporters argue that ‘Rather than just box-ticking, SRI focused investments must demonstrate that they are differentiating companies based on ESG criteria’[6] – but those criteria must inevitably sit in boxes that require ticking or crossing.  Some funds even admit it already: ‘Too often ESG and Sustainable Investment can become a compliance driven, box ticking exercise’[7].

Box-ticking better than nothing?

There are however certainly those like me who would in significant measure welcome such a world of box-ticking, provided it did not dilute as it gained acceptance.  It’s a question of volume: once we have at least a measure of agreement on SRI screening criteria, however partial, and we can boost SRI percentages to a mission critical level, it might just be possible e.g. to starve companies we don’t like such as Xe (formerly Blackwater) or Philip Morris of sufficient funds to enable them to operate at a profitable size.  SRI might – just – start to squeeze objectionable firms out of business however profitable they are in the short term.  That would be good.  But alternatively however firms that fail ESG screens might end up relying on internal funding, as most good firms try to do anyway, or end up driven into the arms of totally unscrupulous investors (think private equity at its unregulated, socially indifferent worst) which would make them impervious to the demands of SRI investors.  

If CSR gets reduced to conformity with the wishes of SRI, then such firms – which include most of the family firms that (speak it softly) employ most and run the planet will have a ‘get out of jail free’ card as far as CSR is concerned.  Such firms, and the private equity companies that invest in them, are already CSR laggards: pressing SRI to the fore will give them all the incentive they need to retreat from CSR altogether – and tragically, might actually rule out the one thing that would curb them: savage regulation.

But in fact, you don’t have to look just at organisational theory to see the conflict between SRI and CSR.  Look at the most basic type of SRI, negative screening. Whilst there is, unfortunately, a huge range of disagreement over what ought to be ‘in’ and what ‘out’ of a screened portfolio, there is widespread recognition that weapons companies ought to be ‘out’ and most ESG screens eliminate them.  

Weighting in indices is a problem

Weapon manufacture is only one example: in the absence of a comprehensive agreement about the weighting of different aspects of ESG screening, a company that – for example – did an excellent job hiring disabled women in India could find itself screened out if it – again for example – made plastic bags[8].  It is not possibly to conceive naively of a world in which such brutal choices will always be necessary.  Fail one, fail all, is the usual ESG system: some companies might well be tempted, if they have already failed on e.g. environmental criteria, to throw in their lot with the sinners generally and abandon all CSR.  Why not?  Once they have failed on one test, no amount of useful charitable giving, sound employment practices, long glossy CSR reports, or anything else on the CSR scoreboard will make a penny of difference to the share price or cost of capital.  Plastic bag manufacturers, therefore, may see themselves as pariahs and abandon CSR altogether – and so might well tobacco manufacturers, arms manufacturers, airlines, oil and gas companies, and just about every company that feels itself threatened or excluded by the rising tide of SRI.  The effect of widespread ESG screening therefore might well be to reduce the level of CSR in the world, not increase it.  Or the world might divide between saints and sinners, with CSR playing the role of a Catholic pardon not needed by the sainted companies that pass ESG screens.

Impact investing a better solution?

So far though I’ve just looked at the potential effect of ESG screening.  We’re already well beyond that though, into the world of impact investment, where investors seek (without prejudice to their own interests) to make the world a better place by investing to effect.  What happens to CSR here? Powerful institutional investors might well be able to impose their own (usually liberal) values on companies that, left to their own devices, might pursue very different goals.  For example companies might constrain their overt adherence to religious principles in order to attract investment which would aim at – for example – women’s emancipation in developing countries.  Impact investment (II) if it is to work must constrain the freedom of action of investee companies’ directors, even if usually II objectives and investee companies’ objectives coincide.

A large fund might consider itself a successful II investor if the effect of an investment was to improve the living standards of a group of people far removed from the customers, suppliers or any other stakeholders of an investee company – whose directors and other shareholders might be reduced to local puppets, following the instructions of an enlightened higher being with much wider (but so often largely environmental) interests quite unidentifiable with any rational CSR policy of the investee company.  Is this an unimaginable notion?  No, certainly not: the II view of GM crops stands out as one example, where reducing local living standards by eliminating GM crops can be presented as an II triumph – albeit one hard to reconcile with any CSR policy of the now-impoverished local company.

To take another agricultural example, a CSR company (and actually any outside observer) might well take the view that the domestic policy of a country that restricts agricultural imports from developing countries renders the II of its Sovereign Wealth Fund (SWF) inherently contradictory – would such a company then reject investment from that SWF on ethical grounds? The number of potential conflicts is legion.

Conclusion

So that’s my argument: there is far from a happy synergy between CSR and SRI.  It’s interesting to note in conclusion that whereas CSR practitioners do not seem to recognise the threat to their profession that SRI may pose, SRI proponents themselves are alert to the possibility that they themselves might be outflanked by democracy.  It is surely fascinating that EUROSIF specifically excludes investment action driven by legislative requirements.  For example investment in screened arms manufacturers that are not involved in land mine production following the 2006 legislation in Belgium[9] – this is specifically not SRI, by the EUROSIF definition[10].  So it would seem that as legislation mandating funds to invest ethically (or at least not destructively) spreads, SRI should die a natural death.  I for one would welcome the day when SRI becomes unnecessary – and SRI’s greatest achievement would have been contributing to its own demise – but what makes me think that the emerging discipline itself would not welcome such an eventuality?  In the meantime, CSR and SRI may drift apart quite significantly.  We shall see.

[By Julian Roche with additional editing by Michael Hopkins, CEO, MHC International Ltd]

 



[1] An exhaustive internet search in April 2012 failed to reveal the slightest notion of such a contradiction

[2] Tortuously and possibly circularly based on the dividend theory of the cost of equity capital, but some evidence nonetheless

[3] IRIS: Impact Reporting and Investment Standards http://iris.thegiin.org/   accessed May 1st 2012

[4] http://www.ethicalinvestor.com.au/index.php?option=com

[5] How long before we start to see the rise of a discipline of ‘SRI compliance’ and the employment of ‘SRI Compliance Officers’?

[6] http://www.emergingmarketsesg.net/esg/2011/06/17/five-questions-about-sri-%e2%80%93-weekly-expert-interview-with-amol-titus-ceo-indonesiawise-june-17-2011/

[7] http://www.ethix.se/content/our-clients

[8] This very point came up recently in a debate within a private equity company about ESG and II

[9] http://www.the-monitor.org/index.php/publications/display?url=cm/2009/Overview.html

[10] This seems to be nonsensical – as if the only satisfactory burglary statistics are those where there burglary is not an offence – not to mention disregarding Australian election results because voting is compulsory

 

 

MHCi Monthly Feature: January 2012

 

CSR and Employment – is there a connection? Is it the responsibility of corporations to create employment?

 

Dr. Michael Hopkins, CEO, MHC International Ltd

 

Modern methods of production have given us the possibility of ease and security for all; we have chosen, instead, to have overwork for some and starvation for others. Hitherto we have continued to be as energetic as we were before there were machines; in this we have been foolish, but there is no reason to go on being foolish forever.Bertrand Russell (1932..see full transcript on http://www.zpub.com/notes/idle.html, accessed Dec 2011]


Is it the responsibility of corporations to create employment?

There is much talk about creating jobs today as unemployment inexorably stays high around the world.  Two issues immediately follow from such a statement.  First, what do we mean by unemployment and second, why do we need jobs?  Many people would say that I am splitting hairs and people need jobs of almost any kind.  But, before I move to the main examination of this article which is can we expect corporations to resolve the issue of jobs, I cannot proceed without a quick digression on the two questions posed.

What is unemployment and why jobs needed?

The unemployment rate has a numerator, number not employed, and a denominator, the labour force.  These are both measured by labour force surveys and, the indicator most often cited, is the definition provided by the ILO.  Briefly, those not employed are those who did not work for money or income in kind for at least one hour in the previous week or day prior to the survey.  Those in the labour force have to be in the labour force age range and, if not employed, have had to have done something to find work in the previous month.  Thus one can be employed, for instance, even if income is ridiculously low.  One cannot be unemployed if one has become discouraged from looking for work.  Thus the remarkable change in the unemployment rate from 9% to 8.6% in November 2011 in the USA, for instance, was as much to do with the private sector increasing employment as it was with labour withdrawing from the labour force because they had become discouraged after not finding employment for some time.  Long-term unemployment is a considerable problem and one can only imagine the terrible hardship of such people it impacts upon.

But we must also think of what is a job?  Bertrand Russell ably wrote, reproduced above, that we do seem to have our priorities mixed up.  People obviously need to work when that is the main way of receiving income.  Yet, we treat all employment as the same when most struggle to survive on what they receive while, as the worsening income distribution statistics across the world demonstrates, some are benefitting enormously from current circumstance.  Distressingly, as Krugman so often shows in the pages of the New York Times, most of these high income earners do nothing to create employment.  Worse they make bets on outcomes that often make things worse.  One only has to remember the collapse in financial institutions and the bail-out of too big to fail institutions to know that financial betting has been supported by many Governments through de-regulation and massive financial transactions to banks.

Increasingly, having a job doesn’t bring with it rewards necessary for basic survival.  With attacks on reducing deficits through reducing public expenditure, we are increasingly left to the private sector to find the jobs.  Cutting public expenditure in recessionary times especially those that are job related has struck many as foolish (as I argue below).  Again, Krugman describes the hope that the private sector will take up the slack because confidence will increase as the public sector declines as hoping for a magic ‘confidence fairy’.  The hope that the private sector will invest in a recession belies the fact that corporations are hoarding a vast amount of wealth that is not being invested.  Further, the private sector will tend to invest, not necessarily according to national priorities but across oceans where emerging markets provide higher returns.

Basic income

In the vein of Bertrand Russell, some have suggested the need for a basic income to be paid to all individuals in society.  This income would replace the myriad of public subsidies currently allocated, provide security hence income when there are no jobs, and be enough to meet basic needs.  Clearly, production systems can provide the goods we need to great access without full employment.  A basic income would therefore, theoretically, be very attractive.  But beyond the calculation of whether it could be afforded, comes the process of passing the necessary legislation through our democratic institutions.  Today, US congress will hardly pass anything that might raise public expenditure, for instance slightly raising taxes of the rich and maybe passing up the opportunity or a war or two, urges macabre thoughts i.e. we must await total collapse, the threat of global warfare before we do anything.  It is well-known that our societies rarely adopt radical change without a major disaster.  But I can hardly welcome catastrophe for our societies so sensible change occurs.

The result

Nonetheless, one of the main results of increasing unemployment coupled with declining wages has led to a worsening income distribution as the now famous graphic for the USA illustrates.

 

Europe has not escaped either and as Cockburn wrote in CounterPunch[1] ‘The argument against the eurozone is that hard-faced Euro-bankers—their killer instincts honed at Goldman Sachs, Wall Street’s School of the Americas—have the power to act as the bully-boys of international capital and impose austerity regimes from Dublin to Athens, scalping the poor to bail out the rich.’  This, in turn, is what the Occupy movement is all about i.e. their starting point is highly unequal income distribution and their protest is to try and do something about it, as I have argued elsewhere[2].

CSR an answer?

Returning to the main point of this article, as unemployment levels remain high and will probably stay that way for the next year or so, until reflation and inflation encourage a different model as I shall point out below, should corporations be doing more to create employment? Is this part of their social responsibility?

The short answer is probably they should do something.  As I noted above, the longer answer is what sort of jobs are we talking about anyway?  Creating jobs for their own sake simply to transfer money so that it can be spent takes us into the trap so ably summarized in the Russell quote above.  There are many types of employment yet much less is currently required to supply us all with the goods we need.  What we really need is a system that re-cycles wealth earned into people’s hands as fairly, and sustainably, as possible.  Unfortunately, we have not found an adequate way to do that.  Communism attempted this and failed as market mechanisms were not allowed to work and shortages of just about everything replaced unemployment.  It also led to concentration of power in non-transparent, repressive,vicious people and non-functioning committees.  The market system works well as long as it has a strong dose of democracy although it does tend to move to a cyclical inheritance of creating unemployment in recessions often caused by excess public expenditure and then on things with hardly any forward investment multiplier such as tanks, drones, aircraft carriers, nuclear weapons etc. which we hope are not to be followed by a trumped up war.

CSR for private corporations also means social benefits and living wages, both of which by the way are subject to continuing debate and not something I can either resolve nor shall discuss in this article.  Suffice to say that the one area that is in immediate need of attention is the question of socially responsible restructuring.  As employment reduces, firing someone immediately with little or no warning subjects the victim to many more hardships than simply losing a source of revenue.  Depression, feelings of failure and hopelessness quickly ensue.  We all know it is easier to get another job, assuming they exist, if you are already employed.  Socially responsible restructuring and re-training would address that issue and even keep the ‘fired’ on board as re-training and access to infrastructure such as an office are provided.  Both of which require little cost although complications of security in our age of essentially service sector jobs needs imaginative solutions.  Not often realized is the devastating loss of human capital that can hardly be re-invigorated as jobs return and demands for lost and skills increase.  An highly skilled laid-off service sector worker is hard pressed to keep up with new technology as one iphone replaces another’s blackberry.  The loss to a nation is hard to calculate but may easily drop future economic growth by several percentage points.

But large corporations, as the OECD graphic shows below, do not create many jobs themselves. 

 Obviously the structure of the business population varies between countries, but so does the distribution of employment. For example, in Greece, Italy and Portugal micro-enterprises account for more than 40% of employment, while they represent around 10% or less of employment in Israel, theUnited States and Luxembourg.  In all countries shown, small and medium-sized firms withless than 250 employees account for the majority of jobs[3].   The implication is, often, that therefore investment should be made in small firms and medium sized (definition always varying but less than 250 employees) since they create jobs more rapidly than larger firms.  However, anyone familiar with input-output matrices, will know about direct effects as well as indirect effects.  Put simply, a small or medium sized enterprise needs larger enterprises and/or the public sector to provide the demand for their goods and services.  Regrettably there is little or no research on that issue.

 

 

 

Yet, corporations are concerned about poor income distribution and high unemployment simply because, for most of them, they need markets for the goods and services they produce.  The photo outside the US Chamber of Commerce shows the Chamber’s concern on JOBS even if the prescriptions and books cited in their website might miss a number of key texts[4].  As if President Obama didn’t know, the huge letters marking out, JOBS, can be seen quite clearly from the President’s private dining room on the second floor of the White House, just across the road in Washington DC (as could the author if the President was quick!).  

 

The US Chamber website acknowledge that Americans have become increasingly concerned about the economy, their faith in the free enterprise system remains strong, according to a survey by the U.S. Chamber of Commerce. While government efforts to stimulate the economy are considered useful in the short term, we as Americans believe that it’s the free enterprise system that will grow our economy and create jobs over the long term.  Surprising, therefore, that the US Chamber has been one, if not the, biggest lobbyist against just about any action by the current Obama Government including its stimulus package (variously agreed to have preserved or created 700,000-3 million jobs, the large range indicating the difficulty of estimation), while paradoxically admitting ‘government efforts are useful in the short-term’.  In fact the right form of stimulus to create jobs was not entirely used for instance about a third was used to cover tax relief[5].  The point of course, to use a pun, is where to put the pointer between private markets and public intervention.  One of the books missed by the Chamber was that of John Maynard Keynes (see below) and no lover of the public purse was he as he made a fortune working from his home with his stockbroker.

Under the guise of CSR, corporations need to start thinking how much of Government support they think the economy should absorb and where they come in to promote jobs.  Providing lobbyist funds to the most outspoken and not well admired politicians is self-defeating.  But even corporations are rent-seeking i.e. will invest in areas that are in their own best interest.  As the graph shows below, simply encouraging the corporate sector to create jobs such as providing tax relief on investment for instance, may not necessarily work directly.  There is a tendency to set up protectionist barriers to prevent the sorts of picture happening that we see in the graph.  However, creating jobs overseas also means creating overseas consumers.

Source: http://thinkprogress.org/wp-content/uploads/2011/04/wherejobs.jpg accessed Nov 30 201

 

How to avoid recession in market economies?

Elsewhere I have outlined what would have been the Keynesian response today[6].  Briefly, his story is based upon the fact that economic growth is based upon the growth of private and public consumption and investment, and the balance of trade of goods and services (the Keynesian equation).  Employment cannot rise unless there is economic growth that is not merely jobless growth due to solely productivity growth.  In the absence of private consumption and investment and a poor trade balance, the only source of growth will be the public sector.  Now with today’s urge to reduce deficits the ONLY solution has to be the private sector.  But when that is not growing, as now, and when interest rates are historically low it makes sense to borrow to invest and/or provide transfer payments to the unemployed.

But, right across the world, few countries are currently borrowing to invest.  The main outcome will simply be rising unemployment and continuing recession.  So, sorry, the ONLY solution is stimulus unless the private sector thinks that low consumption will suddenly reverse.  But it wont without a stimulus. 

So are corporations irresponsible for not investing or are governments irresponsible for not introducing more stimuli?  Well something has to move somewhere or we get stagnation or, as now, a deepening recession.

Now how would CSR work in that equation?  Keynes was certainly in favour of Government responsibility[7].  Indeed, if we link CSR to his equation we can see, using today’s terminology, that economic growth needs to be ‘sustainable’ and fairly distributed, consumption needs to be conducted responsibly and energy saving, investment needs to be socially responsible and trade must not be exploitative and use harmful products.  As it happens, all these ‘new’ concerns do, in fact, give rise to new forms of economic growth (of the sustainable kind) and different forms of employment.

But if even one of the aforementioned conditions is voided we are in for trouble.  For instance, what happens when the rich get richer, as in many industrialized economies, their taxes reduce and taxes on the poor and middle classes increase?  This has happened in Greece and the UK and is also suggested by some in the Presidential race in the USA…albeit slightly disguised with the need to simplify the tax code?  Answer: You get ‘Occupy Wall Street’!  See our suggestions (Occupy Wall Street Manifesto) for possible outcomes of the Occupy protest.

Despite the wonderful essay of Bertrand Russell, he does also note that ‘what a man earns he usually spends, and in spending he gives employment. As long as a man spends his income, he puts just as much bread into people's mouths in spending as he takes out of other people's mouths in earning’.

Conclusion 

Despite the reluctance to re-read Keynes in today’s recession even with the hindsight of 75 years since his great work, counter-cyclical stimulus is required.  But we also need both Corporate and Public Responsibility to create the sorts of Sustainable development we would all like to see across the whole planet.  Certainly, large deficits have complicated matters and Governments must keep a close watch on bond markets for the coming decades.  Yet, the political bias[8] both in the USA and Europe is to favor short-term stimulus by lowering taxes but not raise spending with an eye on long-term deficits through cutting public spending and raising taxes.  This dual balancing act is, in fact, exactly what Keynes recommended.  When times are hard increase stimulus, including public consumption and investment but quickly move to balance deficit budgets when growth returns.  The danger in our economies today is that the former is happening too little while the latter, which depends on the former, simply may not occur in time leaving debt to rise to hazardous levels thereby, as Samuelson points out ‘undermining Keynesian economics as taught in standard texts’ and, more seriously, leading to perpetual unemployment and recession.

[Comments gratefully received on an earlier draft from Adrian Payne, John Lawrence and Peter Moss]

 

 

 

 

 



[1] http://www.counterpunch.org/2011/12/16/farewell-to-c-h/ accessed Dec 18th 2011

[3] And as Prof. John Lawrence of Columbia University pointed out to me for even smaller enterprises (personal communication 23 dec 2011) more new employment (in terms of tax-paying employment slots/positions) are indeed spawned by establishments with <100 employees rather than larger, according to National Establishment Times Series (NETS) data in a 2008 article by Neumark et al for the NBER (2008) see http://www.nber.org/papers/w13818  (accessed Dec 23 2011)

[5] By March 30, 2011, (just after the close of FY 2010) the program had spent $633.5 billion: $259.9 billion in tax relief, $181.7 billion in entitlements and $191.9 billion in contracts, grants or loans. (Source: http://useconomy.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=useconomy&cdn=newsissues&tm=154&f=10&tt=2&bt=1&bts=1&st=11&zu=http%3A//www.recovery.gov/Pages/home.aspxRecovery.gov accessed 23 Dec 2011)  Yet, as Peter Moss remarked (private communication Dec 2011) government spending and the fiscal deficit (i.e. stimulus) are high, and more could be made of the idea that better spending might make the stimulus more effective, even if more spending is not possible.  If the extra spending were used for intelligently selected public projects it might do a lot more for the economy and jobs than just throwing money randomly into the population, much of which just gets saved or spent in China or India.

[7] John Maynard Keynes was extremely active in his campaign to encourage the government to take more responsibility for running the economy.  In 1936 Keynes published his most important book A General Theory of Employment, Interest and Money where he argued that the lack of demand for goods and rising unemployment could be countered by increased government expenditure to stimulate the economy. His views on the planned economy influenced President Franklin D. Roosevelt and was a factor in the introduction of the New Deal and the economic policies of Britain's post-war Labour Government

[8] Based upon arguments in Robert J. Samuelson, Bye-bye, Keynes?, New York Times, December 18, 2011