The Planetary Bargain

Corporate Social Responsibility Matters

Michael Hopkins

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136552656
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

Corporate scandals and lack of confidence in our largest institutions mean that corporate social responsibility (CSR) now matters more than ever. Encroaching on CSR are concepts such as corporate sustainability and corporate citizenship, and older concerns with business ethics, business in society and the ethical corporation. This significantly revised and updated version of The Planetary Bargain explains the relations among these concepts and reflects the author's new ideas and their new context.Enterprises across the world are waking up to the need for social responsibility towards shareholders and potential investors, managers and other employees, customers, business partners and contractors or suppliers, the natural environment and the communities within which they operate, including national governments and non-governmental organizations.Drawing on case studies of international companies and analysis of research from the past two decades, The Planetary Bargain shows how corporations can preserve their profitability while treating all stakeholders ethically and responsibly. It suggests a cooperative CSR strategy which creates prosperity for corporations and for the people they serve. It presents the case for a worldwide agreement, or 'planetary bargain', between private and public sectors, arguing that it is good for business and essential for future prosperity and stability.

Chapter 1

Why Corporate Social Responsibility?

This chapter introduces the notion of corporate social responsibility (CSR), from its historical roots to what is happening today, particularly in the US and UK, where ideas about social responsibility have made their biggest impact to date. The key issue for a business is its bottom line, and how social responsibility either contributes to or weighs against this. I look at this under the heading: ‘Is business’s only job to make a profit?’ Linked to this important question are three further areas that have dominated the CSR debate in recent times: stakeholder theory, the notion of trust and business ethics. I examine each of these areas in this chapter in relation to how they fit within the framework of a socially responsible enterprise. There are a variety of definitions of CSR and no overall agreement. My own definition, which I elaborate in various sections throughout this book, is:

CSR is concerned with treating the stakeholders of the firm ethically or in a responsible manner.

‘Ethically or responsible’ means treating stakeholders in a manner deemed acceptable by society. Social includes economic responsibility. Stakeholders exist both within a firm and outside – the natural environment is a stakeholder. The wider aim of social responsibility is to create higher and higher standards of living, while preserving the profitability of the corporation, for peoples both within and outside of the corporation.

Introduction

Historical roots

CSR is not a new issue. The social responsibility of business was not widely considered to be a significant problem from the time of the 18th-century Scottish social philosopher and classical economist Adam Smith to the Great Depression in the 1930s. But since the 1930s and, increasingly, the 1960s, social responsibility has become ‘an important issue not only for business but in the theory and practice of law, politics and economics’.¹ During the early 1930s, Merrick Dodd of Harvard Law School and Adolf Berle of Columbia Law School debated the question: ‘For whom are corporate managers trustees?’² Dodd advocated that corporations served a social service as well as a profit-making function, a view repudiated by Berle. This debate simmered for the next 50 years, according to Gary von Stange, before it once again sprang into prominence during the 1980s, in the wake of the ‘feeding frenzy atmosphere of numerous hostile takeovers’. This concern for the social responsibility of business has even accelerated since the fall of the Berlin Wall, which symbolized the collapse of communism and (more importantly) has turbo-charged globalization.

Further acceleration has occurred in the past few years. Global concerns were given an additional edge by the awful events of 11 September 2001. The collapse of Enron and WorldCom and their auditor Andersen due to dubious accounting practices has raised the level of examination of large companies, as well as their auditors. At the time of writing, this occurs in spite of the most friendly-to-companies US president known in modern times, George Bush – with a dubious past in share dealings and in ‘sailing close to the wind’ in business transactions as Paul Krugman’s ‘Op-Ed’ columns in The New York Times have carefully analysed. Even the president has broached, albeit tamely, the notion of the responsibility of corporations.³ Moreover, previously quiet chief executive officers (CEOs) have begun to note the pressure. For instance, in a rare public appearance in June 2002, the chairman and chief executive of Goldman Sachs, Henry M Paulson Jr, noted, after the collapse of the Enron Corporation in late 2001, that ‘I cannot think of a time when business overall has been held in less repute’.⁴

Moreover, the need to address questions of low living standards, exploitation, poverty, unemployment, and how to promote social development in general, has been almost entirely the preserve of governments. Clearly, they will continue to have a, if not the, major role to play. But in the future, the promotion of social development issues must increasingly also be one of partnership between the government and private and non-governmental actors, as well as – in particular – the corporate sector. The importance of this is brought home by their size. When companies’ turnover is compared with the gross domestic product (GDP) of countries, then, of the world’s largest 100 economies, 50 turn out to be corporations!⁵

Up until the 1970s, despite regulation and legislation, business continued largely along an autonomous path from which it ignored its critics and listened only to its shareholders, to whom it felt somewhat responsible. But the decade of the 1960s was to be a period of enlightenment for many. The Korean War had ended indecisively, and new conflicts in South-East Asia seemed destined to follow the same pattern. Citizens were distrustful of government, of business and of the undefined ‘establishment’. Consumers had grown suspicious of adulterants in their food and dangerous defects in the products they bought. People were becoming aware of the fragile nature of the Earth’s ecology, while simultaneously becoming more cognisant of human rights.

However, the drive during the 1970s to set every nation to contribute 1 per cent of its GDP to socio-economic development failed miserably, with only small countries such as the Netherlands and Sweden getting anywhere near that figure. The largest economy, the US, gives only a meagre 0.1 per cent, and most of that goes to only two countries – Egypt and Israel. Now, should we expect those companies with turnovers larger than that of Holland to contribute 1 per cent of turnover to compensate – that is, to fill – this gap where nation states have failed? Is this excessively naive, or is it crucial that they do so to secure future sustainable development? The fact that over 300 UK companies already belong to a Per Cent Club, with an aim of contributing 1 per cent of pre-tax profits to the community, is both a step in the right direction and an indication that many firms are beginning to take their social responsibilities seriously.

The focus, in this book, is on the largest companies – the transnational corporation (TNCs). By the early 1980s, trade between the 350 largest TNCs contributed about 40 per cent of global trade; today, the TNCs account for 70 per cent of the world’s trade. In addition, foreign direct investment from TNCs doubled from the early 1980s to the early 1990s, from US$910 billion to US$1.7 trillion. Because of the often immense size of TNCs, decisions about the location of their investments, production and technology not only influence the distribution of factor endowments – notably of capital, skilled labour and knowledge – between the countries in which they run their activities, but also assume a crucial importance for their political and social consequences.

Today

Today we see consumers avoiding what they see (rightly or wrongly) as socially irresponsibly made products or products of companies that have allegedly not acted in society’s best interest. It is inevitable, as I shall argue in this book, that, more than ever before, companies in the private sector will be expected to behave socially responsibly. Already, many enterprises across the world have taken this as part of their business plan, and, one may note, they are doing this because they feel it is good for business.

Enterprises have noted that social responsibility is good for business for, and from, each part of the seven main azimuths within which they trade and operate. These parts are their shareholders and potential investors; managers; employees; customers; business partners and contractors or suppliers; the natural environment; and the communities within which they operate, including national governments (discussed in Chapter 3). These azimuths are now commonly known as an enterprise’s stakeholders. I will show with anecdotal and statistical evidence throughout this book – and, in particular, in Chapter 9 – using data for the largest enterprises in the UK, that an emphasis on stakeholders does not hinder profitability. On the other hand, negative social events, such as a poor internal human-resource policy, cavalier downsizing, and an industrially caused environmental disaster or conviction for a corporate crime, are likely to have harmful effects on profitability and return on investment.

On the plus side, according to the US Social Investment Forum, for the first time ever, more than US$1 trillion in assets are under management in the US in socially and environmentally responsible portfolios.⁶ Estimates vary, since it all depends upon definition; but this latter figure has been backed up in the September issue of The Cerulli Edge-Global Edition published by Cerulli Associates, a well-regarded Boston- and London-based research consultancy who estimated, in September 2001, the value of the world’s ethical investment portfolio to be US$1.42 trillion.⁷

In the UK pension fund, trustees are required to incorporate their policy on socially responsible investment (SRI) in their statement of investment principles (SIP) – the document that sets out the aims, scope and restrictions for the investment of the pension fund. Concomitantly, there has been a rapid expansion of firms that screen companies for socially responsible performance, which is having a positive effect on the redirection of investors toward those companies that are top performers in this area. According to Eiris, in the UK about US$49.3 billion was invested in SRI funds in 2001, less than 1 per cent of total funds under management, although this figure has been doubling every two years.⁸ Across Europe, about US$9.38 billion was under SRI management in 2001, again according to the SRI monitoring firm Eiris.

Pension funds and other financial vehicles have billions of dollars available, and speak with a loud voice as their members become increasingly concerned about where and how their money is invested. Indeed, appalled at being implicated in antisocial practices, thousands of investors are placing ethics on a par with personal gain in choosing where to put their money. In response, a number of money managers are tailoring portfolios to allay their clients’ qualms. By now, the managers of billions of dollars of investment funds have channelled their cash into companies that pass one test or another for ethical or social responsibility. For people investing their own money, several investment management companies maintain blacklists of ethically or socially irresponsible companies.

Moreover, poor social performance will drive away potential investors. The increase in litigation, especially in the US (arising from corporate lawbreaking), has strengthened the penalties on professionals and has made the conduct of business a hazardous occupation. Because of the litigation explosion, business now faces a two-front battle: increases in both the number of multi-million dollar verdicts and the number of actions actually filed. Expanded third-party liability means that many more professional groups are being held liable, including underwriters, accountants and lawyers. The year 1992 was the first in which substantial awards were given to corporate whistle-blowers; since then, the increased focus on business conduct has coincided with the growing public perception that business should be more socially responsible.

As the public becomes aware of the negative consequences of the social irresponsibility of some businesses, so too has it become aware of good products and socially responsible activities. In parallel, business has also become equally aware of the informed consumer and/or investor. Yet, although TNCs could potentially play an important role in social development, their current impact on this process is moderate, according to some commentators.⁹

Corporate wrongdoers

Alice Tepper Marlin, the founder of the US Council on Economic Priorities (CEP), was the original promoter of a report that has since sold 600,000 copies with the title Shopping for a Better World: A Quick and Easy Guide to Socially Responsible Supermarket Shopping. The book rated 168 companies behind 1800 products in such areas as charitable giving, community outreach, information disclosure, environmental impact and family benefits. So many people contacted companies after the 1989 guide was published that the 1990 issue included an appendix with the names and addresses of all the listed companies’ chief executive officers. A CEP study of buyers of the guide found that 78 per cent said they had switched brands as a result of using it, and that 64 per cent refer to it regularly. The seeds of CEP were planted when Tepper Marlin was a Wall Street securities analyst with a client who did not want to invest in companies that supplied arms for use in Vietnam. Since its beginning, CEP had an impact far in excess of its size, now at 6500 individual members.¹⁰ CEP has since evolved into Social Accountability International (SAI) and promotes labour standards and rights with its instrument known as SA8000 (Social Accountability 8000 – see Chapter 7).

Responsible corporations

There are many attempts nowadays to reward good corporate social performance (CSP). It seems that not a month goes by without some publication announcing winners of a corporate award, and these have more than doubled since 1979. According to Gita Siegman, editor of the tenth edition of Awards, Honors and Prizes, there were 6000 listings of awards in the US; in the latest edition, there will be 15,500 listings.¹¹ Besides the normal complement of prizes in arts, sciences and letters, corporate awards can be given and received in such diverse categories as women’s achievement, human rights and environmental correctness...