Articles

December 2008 Monthly Feature

Recession: CSR is still good for business!

By Michael Hopkins

 Abstract:There is little doubt that the lack of responsibility in markets, check have led to today's current financial turmoil and recession in most international markets. The private sector has taken a huge blow but we cannot return to central control. CSR, here as this article argues, hospital provides the elements of a solution especially since its ideas were largely ignored by many of the big financial players to date.

Introduction

CSR is a strategic approach to managing a company, not simply an add-on. This short article emphasizes that fact.CSR encompasses all stakeholders of a company not just a few, and, in these recessionary times, I shall argue below that CSR is needed more than ever before.

As Thomas Friedman has noted on frequent occasions in the New York Times:

‘I am totally disgusted.Why?This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.... That's how we got here - a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash.'

However, if you adhere to the theories of Adam Smith you may disagree.Smith argued more than 200 years ago that the general welfare was better served by people pursuing their enlightened self-interest than by misguided attempts to serve society.Shades of 1970s Milton Friedman about the business of business is business!

Globalization Turbo-Charged

Yet, their views are even less relevant today than before and the world has gone full circle since I started working on socio-economic issues - first at the Institute of Development Studies at Sussex University then in the World Employment Programme of the ILO.In the 1970s and early 1980s the phrase ‘private sector' was hardly to be seen in those organisations.Little was said about the private sector and just about nothing on CSR.

But it was the fall of the Berlin Wall that symbolized the collapse of communism, turbo-charged globalization and heralded a new era for the private sector.

In fact the love-affair with the Adam Smith view of the private sector continued unabated until only a few months ago.Before then, the few scandals that shocked the world had hardly dented people's confidence in the private sector.For instance, on November 10th 1995, Ken Saro-Wiwa and eight Ogoni colleagues were executed by the Nigerian state for campaigning against the devastation of the Niger Delta by oil companies, especially by Shell and Chevron.This led to Shell completely re-engineering its company along CSR lines and, effectively, launched the global interest in CSR.

So, CSR - what is it?

CSR is concerned with treating the stakeholders of a corporate body ethically and in a responsible manner [1]. Yet, others misleadingly define CSR to be simply ‘philanthropy' or, as in a just-published article I read on the economics of CSR from Harvard University which defined CSR to be ‘sacrificing profits in the social interest'.This is wrong: the central point is how profits are made, NOT profits per se.

In fact the tools of CSR can be applied to any ‘corporate; body - NGOs, Government, International Organisations, Small Companies and even to Nation States. When applied to the latter an index I have created[2] shows that, depressingly many, if not most, countries lack social responsibility. The key stakeholders of any Nation State are their citizens and their trading partners.Consequently, National Social Responsibility can be defined as:

A State that treats its citizens fairly, looks after their well-being, and is respectful to foreigners - immigrants as well as their trading partners.

Using this definition we, at MHC International Ltd (MHCi), have ranked countries and found, unsurprisingly, that Sweden comes top while Somalia and Zimbabwe, tragically, come last at the 180th position.

What corporations are doing on CSR?

According to my company's own mail bag, CSR is attracting interest across all markets - from China to India to Brazil - each with differing rationales.In Dubai - where I chair the jury of a CSR award for Gulf-based companies - the concept is still very much focused on philanthropy, although this is starting to change.The winners of the Arabia award, using MHCi's methodology[3], were announced during a high profile event at the famous seven star Burj Hotel in Dubai.Awards were given for small, medium and large companies with the winner being the Swiss engineering company ABB.This was because they had a CSR policy for all stakeholders not simply a few.

In a poll conducted for The Economist of 566 US based respondents earlier this year, 74% said that CSR can help increase profits.

In fact, CSR is not expensive although the respondents did think that financial philanthropy would be reduced over the coming year.A recent example illustrates simple, but powerful, applications of CSR.When the three CEOs of Ford, Chrysler and GM came to Washington DC a few weeks ago to argue for a $US25billion bail out of their companies, the Senate committee was scandalized that the three CEOs each flew in their private jets from Chicago to DC.At a time of recession, socially responsible CEOs would, at least, have shared the same jet or, better still, traveled commercially.As we speak, their loan has still not been approved.

Now where are we?

Normally, an article written today on this topic would announce that we are in uncertain times and we don't know how the future will unfold.But, in fact, the future is more certain than ever before, especially for CSR.The recent turmoil in markets shows a role for more stakeholder engagement and legislation in previously unregulated areas.

Take Lehman Brothers for instance.They stated in their 2007 letter to their shareholders [1] that

'Strong corporate citizenship is a key element of our culture. We actively leverage our intellectual capital, network of global relationships, and financial strength to help address today's critical social issues.'

But, as one commentator noted:

Lehman Brothers did not produce a CSR report, but they produced a philanthropy report. Even if they had gone further, it seems unlikely that the complex nature of how they created wealth would have been a feature'

In fact we at MHCi had suggested to Lehman Brothers early in 2007 to carry out a strategic CSR review and to examine all stakeholders.Our proposal, despite a vigorous correspondence, was not accepted.A careful stakeholder analysis could well have discovered Lehman's problems in the sub-prime market and alerted top management.

Although. in the short-term future there is no doubt we shall see contraction in the private sector, but the growth area will certainly be an increased compliance for CSR and CSR will become more important as regulation for the ethical behavior of companies becomes more and more important.

What does CSR mean for emerging markets?

An example is the case of Azerbaijan.It has already discovered that BP's approach to CSR was very helpful in the construction of the Baku to Ceyhan pipeline.Not without controversy, but BP's approach to working with a key stakeholder - the communities adjacent to the pipeline's route - has been, on balance, helpful.It claims to have spent $US100mn on CSI projects for communities in Azerbaijan, Georgia and Turkey[4].

As Lord Browne, the former CEO of BP stated,

I believe that our long-term future depends on our environmental and social performance.Excellence in operational performance generates financial returns, but enduring growth depends on something more - on being a responsible citizen in the world and earning the continuing support of customers, shareholders, local communities and other stakeholders.

To date, Azerbaijan companies, as many others in emerging markets, have focused upon Corporate Social Investment (CSI).This is welcome, but is only a part of an overall CSR strategy.The world's successful and long-lived companies, as the famous book Built to Last showed, are those with a clear vision and those that encompass all stakeholders - management, owners, employees, shareholders as well as the external stakeholders customers, suppliers, the environment, and Government.These are the reasons that companies such as Coca Cola, IBM, General Electric, Tata and Sony, for instance, have been so successful over a long period of time.

So What to do next?

Six points:

First, CSR can help. A major stakeholder of a firm is its employees. CSR does not imply that downsizing should be prevented, that would be absurd. What it does imply (and see George Starcher's report to the ILO for more details on this [5]) is that companies must make an effort to organise layoffs in a socially responsible manner. This could include early warning, counseling, re-training, temporary financial assistance etc. The tendency of US companies to give immediate notice is both distressing and can be counter-productive once re-hiring starts again. There is no doubt that there is an unequal power between companies and employees. A company can recover, it has its own institutions such as banks willing to keep it going through hard times. A redundant employee has none of these advantages and is in a very weak position once he or she leaves the confines of an institution.

Second, CSR urges transparency of operations through socially responsible reporting of activities such as informing shareholders and staff about off-balance sheet holding of debts. Enron, for instance, may well have been in much better shape today if it had behaved in a socially responsible manner. Even though Enron was a lavish donor, Simon Caulkin of The Observer (Feb 3rd, 2002) regarded its CSR as a 'figleaf' and 'of a piece with Enron's overall strategy'. In fact, CSR is an overall strategy for systematic management of all of a company's stakeholders and should not be confined to its PR department!

Third, CSR has not been given as much prominence, especially in the USA, simply because of the legal framework under which most corporations operate. Robert Hinkley argues[6], for the USA, that the law, in its current form, actually inhibits executives and corporations from being socially responsible because the law baldly states that the purpose of the corporation is to make money for its shareholders. Any deviation from that could leave the corporation open to a lawsuit. So Hinkley suggests simply adding a phrase on CSR to corporate law so as to enhance CSR. Law, he advocates, would then read something like -

Directors and officers have a duty to make money for shareholders, but not at the expense of the environment, human rights, the public safety, the communities in which the corporation operates or the dignity of its employees.

Fourth, CSR has a positive impact on the intangible assets of a company and investing in CSR is not simply a cost but also a market opportunity.Assets such as reputation and knowledge networks can turn into a source of market value and competitive advantage.

Fifth, CSR has a long-term affect on improving a company's bottom line.There is a positive link between social and financial performance especially when looking at the increased relevance of intangible assets such as reputation and knowledge networks. These turn into a source of market value and competitive advantage. As Warren Buffet said, reputation takes years to obtain yet can be ruined in a minute.

Sixth, social responsibility is not confined to corporations.Institutions that have a major impact on the way we live are also expected to behave in a socially responsible manner - NGOs and public institutions, as well as personal responsibility.

Conclusion

Main Street and Wall Street cannot be separated.If the captains of those financial companies, now in crisis or bankrupted, had acted more responsibly with a proper Corporate Social Responsibility strategy then their vessels would not have sunk nor would they be on the brink of foundering.Responsible business will be the new mantra.

 In 2009 where will CSR be going[7]?

First, industry in the recession will take a hard look at all their programmes.They will have to look, hard and rapidly, at the business case for CSR...

Second, given the lack of responsibility among Western Sub-prime holders, banks and financial institutions...there will be a new move toward responsibility

Third, great hope has arisen over the election of Obama...this is likely to increase, and encourage, the need for national, corporate, public and personal responsibility.

For organizations caught in financial storms or off course due to the buffetings of the markets, CSR must become part of their strategic planning.A true stakeholder focus crystallized around reworked values is crucial for these difficult times and will help responsible companies eventually sail into calmer, safer waters.

[Earlier versions of this article provided the basis for Michael Hopkins' keynote speeches at the Hilton Humanitarian Awards, Geneva, Oct 2008; CSR Arabia Awards, Dubai, Oct 2008; EurAsia Foundation CSR event, Baku, Azerbaijan, Dec 2008 and University of Quebec, Montreal, Dec 2008. Thanks to Ivor Hopkins for his comments on the earlier version]


[1] Hopkins, Michael (2003) The Planetary Bargain - CSR Matters (Earthscan, UK).

[2] http://www.mhcinternational.com/images/stories/national_social_responsibility_index.pdf

[3] based upon the ideas in http://www.mhcinternational.com/corporate-social-responsibility/publications/measurement-of-csr.html

[4] http://www.csmonitor.com/2008/0312/p07s05-wosc.htm..accessed Dec 4th 2008

[5] See George Starcher's MHCInternational Monthly Feature on socially responsible restructuring

[6] 'How Corporate Law Inhibits Social Responsibility', Robert Hinkley, Business Ethics, Jan. 2002

[7] This was discussed at MHCi's CSR Update by invited CSR experts in London on Jan 13th 2009