Rajat Gupta and Paul Coombes: Accentuating the positives

Corporate social responsibility should not be simply a reactive affair, say Rajat Gupta and Paul Coombes. Companies should become more proactive, engaging NGOs and other organizations in full debate and promoting the positive aspects of their agendas. In this way, they can turn corporate social responsibility to everyone’s advantage –

After a year filled with corporate scandals, bankruptcies, falling stockmarket valuations and accumulating concerns about the health of the global economy, the issues of corporate social responsibility (CSR) are probably not uppermost in CEOs’ minds. In this period of severe economic pressure on corporations, two primary needs are evident. First and foremost is the need to ensure sustained corporate competitiveness.

Market pressures are unforgiving in today’s environment. One consequence of globalization has been the increased level of competitiveness. This is accelerating the rate at which business models become obsolete. As pressures for performance intensify, the stakes are raised for the individual CEO, who is all too aware of the readiness of boards to replace top executives at the first signs of financial underperformance and investor concern.

The second imperative facing many CEOs is the need to ensure that recent steps to reform and strengthen corporate governance are put into effect and that a general upgrading and consolidation of standards is achieved.

Here the focus is on new levels of disclosure, properly diligent institutional scrutiny, tighter constraints against abuses of executive power, the elimination of conflicts of interest and a drive to ensure more effective board performance. The crucial goal is to restore trust among shareholders, consumers and regulators alike.

This is the sobering context in which CEOs have to consider the CSR stance of the companies they lead. Unless a company’s business model meets the financial and governance prerequisites of its very survival, it is unrealistic for it to embark on new, more demanding initiatives.

It is timely in these challenging circumstances to take a closer look at CSR, to take stock of what the CSR agenda has achieved in recent years and to consider how CEOs are likely to evaluate and shape their CSR strategies in the future.

The concept of CSR is not new. The history of corporate activity shows that businesses have always encompassed the notion of broader obligations and commitments to the communities in which they operate. In the 20th century, Andrew Carnegie, Henry Ford, Andrew Mellon and JD Rockefeller were well known for their philanthropy, as were George Cadbury and Joseph Rowntree in 19th-century Britain. Many other examples can be drawn from across the world.

More broadly, many if not most corporations have recognized the value of enlightened self-interest, responding to their own specific circumstances. Indeed, this has been a long-standing requirement for major corporations operating in such areas as the extractive industries. In addition, many corporate leaders – and economists – would assert that the most valuable task that business organizations can undertake is to satisfy the ever changing demands of the marketplace, as the creation of value resulting from this activity provides the economic basis for society.

The new pressures for CSR have come from a different direction. In essence, they spring from the interaction of five major developments of the past 10-15 years:

the impact of globalization, as measured by perceived growth in the power and reach of leading multinational firms;
apparent limitations and weaknesses in the response of governments, both in the supervision of corporate power and in response to environmental issues;
the collapse of competing, non-market models of economic and political development and the appearance of what have been called “failed states”;
the increasing power and effectiveness of NGOs and pressure groups that are geared to establishing some degree of counter-vailing influence;
and the enabling power of the internet to connect and share worldwide information and perspectives on corporate activity and behaviour.
These new interlocking developments have effectively shifted the focus of CSR concerns away from their traditional domain, thelocal and particular, to that of the global and generic. This shift is the result of a new focus on the environment, human rights and labour practices. This is no accident. NGOs, like other multinational groupings, organize their activities from the perspective of the interdependent world of the “global village”. The same forces that have led corporations to organize their activities globally have led NGOs down a similar path.

The critical point of leverage, to date, has been overt pressure on corporate brands. NGOs have succeeded in making corporate leaders aware of the potential vulnerability of their hugely valuable brand assets to determined “anti-branding” campaigns.

Such campaigns are designed to highlight specific contentious decisions or working practices that are perceived to be unacceptable. The writer and campaigner Naomi Klein summarizes the strategy thus: “For years, we in the movement have fed off our opponents’ symbols – their brands, their office towers, their photo-opportunity summits. We have used them as rallying cries, as focal points, as popular education tools. But these symbols were never the real targets: they were the levers, the handles.”

In response to this targeting, it is fair to say that the corporate sector has generally adopted a somewhat reactive stance. In effect, the focus has been on avoiding the negative effects of anti-brand campaigns.

There have been three main ways of doing this. First, a mixture of skilful public relations, designed to counteract adverse commentary and promote better understanding of corporate policies and practices. Second, a substantial increase in disclosure and a heightened commitment to community interests. Third, in a more limited number of cases, substantive changes to corporate policies and practices.

In all these respects CEOs have, to a large extent, been responding to the perceived risk and vulnerability of their businesses at the hands of lobbyists and activists. Obviously the nature of their response and the degree of risk has varied according to the public profile of the individual corporation, as well as the industry in which it operates.

Although pressure groups have sometimes claimed that adopting their favoured CSR policies is good for business – in the sense of creating new profit opportunities and enhancing productivity – the typical corporate attitude has more usually been to regard such changes as simply a cost of doing business.

Although there has been some variance between countries in the speed of adopting CSR, it is now part of corporations’ reporting in the vast majority of countries belonging to the OECD, as well as in many developing economies.

In the UK, for instance, 90% of FTSE 100 companies now report annually on either environmental or social issues. In certain sectors, such as the extraction industries, such reporting is moving towards setting agreed environmental and social standards.

The Mining, Minerals and Sustainable Development Project (MMSD) includes in its membership 28 leading mining companies and 15 non-industry sponsors such as the World Bank, the United Nations Environment Programme (UNEP) and the International Union for Conservation of Nature (IUCN). MMSD has been working to “establish a global framework for the mining sector that will integrate sustainable development into the extraction, production and trading of minerals.” MMSD has recently published guidelines that lay out best practices for the extraction industries.

In recent years multilateral institutions have furthered the cause of CSR by establishing their own reporting processes. Most notable among these initiatives are the Global Reporting Initiative (GRI) and the Global Compact. GRI was convened in 1997 by the Coalition for Environmentally Responsible Economies (CERES) in collaboration with UNEP. It was established “with the mission of developing globally applicable guidelines for reporting on economic, environmental and social performance”.

The Global Compact was first proposed by UN secretary general Kofi Annan at the World Economic Forum in Davos in January 1999. It seeks to develop a relationship between the UN and business that “upholds and promulgates a set of core values in the areas of human rights, labour standards and environmental practice”.

The several hundred corporations that are members of these two initiatives are distributed across the globe, with approximately a quarter headquartered in the US. One in six of the Fortune Global 500 companies are members of one or other of the initiatives.

This momentum is hard to ignore. Although one of the challenges is the proliferation of various CSR standards and codes, increasing numbers of corporations have nevertheless responded to these signals by taking a position on CSR.

This has led CEOs to respect three fundamental principles:

• Transparency: it has become clear that extensive disclosure of a much wider range of information on corporate performance and impact is central to building understanding and trust in the broader community. This is recognized by the companies concerned as being consistent with their own codes of practice. As a result, there has been rapid development in environmental and social reporting and the progressive introduction of new sets of metrics and verification procedures to generate confidence in the substance of these new programmes.
• Engagement: leading corporations have also understood that a willingness to listen, discuss, explain and respond to new evidence about performance and initiatives is the name of the game. Engagement is a two-way affair, bringing benefits to both parties involved.
• Advocacy: corporations have sought to understand the viewpoints of the people their actions affect. However, when special interests challenge corporate activity from a narrow point of view, it is appropriate to resist such pressures. Corporations are clear that their concern for the impact of their activities on society does not mean that they have limitless social obligations.

With a large percentage of companies in OECD countries now responding to CSR in some manner or other, it is possible to say that the first major wave of the global CSR movement has passed.

Of course, there is a lot of infilling still to be done but, conceptually and in practice, leading corporations have acknowledged that their social role and environmental impact will come under scrutiny at the global level. They have responded to the resulting implication that they need to justify their decisions in an effective, fact-based and value-driven way – even when these decisions are controversial or at times disliked by at least some of the pressure groups.

Arguably, the real interest in the CSR debate is moving to new territory. Having accepted the validity of at least some of the NGO critiques over the past decade, there is now an opportunity for CEOs to take the initiative in CSR by “promoting the positives” in respect to their own corporate agendas.

The opportunity arises in three areas. The first of these is to explore the scope for entering what have been called contentious markets, such as the use of biotechnology in health care or agriculture, moving health care or education from the public sector to the private, or in entering developing markets.

Entry can advance CSR goals by bringing far greater effectiveness to the provision of currently inefficient or missing services. Cargill’s entry into the sunflower seed market in India is an example of a successful market entry that contrasts starkly with Monsanto’s efforts to create markets for genetically modified seeds.

Cargill first built trust, winning over hearts and minds by working with Indian farmers to improve their crop yields, whereas Monsanto’s reliance on the force of scientific argument alone led to bitter opposition.

The second opportunity lies in securing greater reciprocity from the NGO community in terms of its own governance and accountability, now that some of the largest NGOs have become substantial fund-raising businesses in their own right with expenditure of several hundred million dollars a year.

For example, Greenpeace has nearly 2.5 million members and 1,140 staff. Amnesty International is as well resourced as the human rights arm of the UN – if not better.

Indeed, NGOs have taken on roles that once might have been fulfilled by the UN or national governments. Approximately 10% of all development aid is now channelled through NGOs. This influence brings with it a need for greater accountability and effective governance processes.

The third opportunity lies in stimulating a more open and fact-based debate on the trade-offs implicit in much of the CSR agenda. Now that CEOs have addressed many of the initial concerns raised by the CSR movement, there is an urgent need to put the goals and programmes of the CSR agenda under scrutiny. To date these goals have been proclaimed as self-evidently good. Yet they show inherent contradictions, whether in the definition of business ethics, or sustainability, or in many other supposedly fundamental concepts.

The dangers of failing to engage in such debate are evident from the case of the Brent Spar oil platform. Shell dismantled it onshore against its better judgment and at greater environmental cost than if it had been disposed of at sea because environmental activists successfully persuaded consumers of their cause.

In contrast, IKEA entered into debate with environmentalists behind the scenes. As a major consumer of hardwoods it is vulnerable to environmental lobbies, yet it successfully engaged and argued with activists about the rights and wrongs of its wood consumption – even going as far as to fund Greenpeace’s efforts to map the disappearing rainforests of the world. Today IKEA consumes new-growth teak with the full approval of environmentalists.

The challenge for CEOs will continue to lie in ensuring that there is a high degree of coherence between the messages and signals they communicate to NGOs and their members, and those that are simultaneously signalled to investors, consumers, business partners and their employees. Like IKEA, they need to develop an integrated “corporate story”.

If the CEO is to succeed in this aim, the corporation’s story cannot be mere spin, as this would simply increase the level of risk in the communication. It needs to be built on a coherent set of policies and practices that are embedded in the way employees work and in the values that they adhere to. It also needs to be an evident component of the proposition to customers and to business partners. Most important of all, it must resonate with the needs of investors for achieving an appropriate return on capital.

A coherent corporate story will build trust as, over time, it proves trustworthy. Identifying, communicating and reinforcing such corporate stories will be at the forefront of CEO concerns in the years ahead.

Rajat Gupta/Paul Coombes
Rajat Gupta is managing director of McKinsey & Co. Paul Coombes is a director of corporate governance practice at McKinsey & Co.