Corporate Responsibility who is responsible?

Transcription

1 Corporate Responsibility who is responsible? Companies are routinely called upon to exercise greater social responsibility. But what should be the role of companies and governments in exercising and enforcing greater levels of corporate responsibility? Andrew Wilson and Leon Olsen examine the continuing debate. "The main losers in today s very unequal world are what can be left to voluntary action? not those who are too exposed to globalisation, The problem is that the concept of CSR is but those who have been left out," observed infinitely elastic. The more companies do in this Kofi Annan, Secretary General of the UN at the area the more they are asked to do. While the 2002 World Summit for Sustainable Development protestors on the streets of Seattle, Genoa or in Johannesburg. The Summit focused on the London may argue that this situation is perfectly ability of the corporate sector to solve many of the justifiable, such an approach is not conducive to world s problems. It is a familiar theme. making CSR a part of mainstream corporate life. "Companies need to take up social responsibilities" is a message which echoes across Europe behaviour can only be achieved by developing a The reality is that integrating CSR into business among ministers of national governments and much clearer understanding of what is meant by members of the European Commission, pressure the term. This involves clearly distinguishing groups and even many corporate executives. between what is absolutely required from But, to what extent is this a realistic view of the companies, and what society expects from them in world? Once governments look into the addition. Indeed, the term CSR is unhelpful. The complexity of Corporate Social Responsibility notions implicit within the concept cannot be (CSR) they seem to falter in making any specific separated from a general sense of corporate requests from business. Instead, CSR is often responsibility something which is much more than defined as a voluntary activity over and above just a voluntary approach. that required by legislation by which companies It is clear that corporate responsibility (CR) is a deliver benefits to society either through good concern that is important to the public, business practice or pure philanthropy. shareholders, employees and consumers of many This argument that CSR should be adopted on a countries. People increasingly judge a company voluntary basis is disingenuous. It ignores a whole according to what it does and how it does it, not raft of legislation compelling business to behave just what is says about itself. A number of well responsibly for example through health and respected international opinion polls show that a safety legislation, environmental protection acts significant proportion of the public believes that and company law. The real issue is defining where business does have wider responsibilities beyond the boundaries of CSR lie. How best can simply making profits, paying taxes, creating jobs government, business and the wider society decide and staying inside the law. what should be legally required of companies, and Andrew Wilson is Director of the Ashridge Centre for Business and Society. 19

2 Corporate responsibility who is responsible? Leon Olsen is a Senior Researcher in the Centre for Business and Society at Ashridge. His expertise revolves around Corporate Responsibility and how individuals, leaders and companies realise their responsibilities in today's complex global business environment The changing role of government In line with these broader public expectations, there is a new and perhaps more demanding force ensuring that business embraces the concepts of CR the hand of government. Thinking of CR as a mechanism by which companies deliver economic, environmental and social benefits makes it very clear that government has a stake. After all, at its simplest, the role of government is to facilitate and encourage the positive aspects of economic activity, while trying to curb or limit the negative aspects. Government is continually trying to achieve a balance between economic growth and social justice. In part, government achieves this by regulating and inducing civil activity, including business, so that it delivers public benefits. If we consider the foundations of the Western market economy, it is clear that the whole notion of allowing private companies to operate comes from a perspective that government is merely trying to induce an effective way to create wealth for the people. Company law (and other regulations on the operations of business) deal directly with granting this "license to operate" to create wealth for the beneficiaries of the company under fair and just conditions while protecting the interests of other stakeholders. This would suggest that CR is simply another policy pursued by government to ensure a more equitable society. Indeed, talking to government ministers and senior policy advisors it seems that within certain government circles CR is often thought of as the new paradigm that will help to achieve the potentially competing aims of government. It is argued that the policies needed to care for society and the environment are the same as those needed for successful economic growth. "CSR is exciting because it offers ways of achieving economic, social and environmental benefits at the same time it is a strength of CSR that its approach gets away from the old view that economic and social goals must always be in conflict," observed a report on business and society published by the UK government in This view seems to be shared across Europe where the emphasis is increasingly on economic and social goals rather than social or economic goals. The tyranny of or is being replaced by the inclusive genius of and. Unfortunately, insisting that CSR is merely a voluntary activity over and above legal responsibility is too simplistic. The reality is much more complex and in many cases the tyrant rules. Different views on CR In order to better understand this tension between economic progress and social welfare we need to unpack what is meant by CR. In thinking about how to define and describe the concept we feel it is useful to distinguish between the instrumental, normative and systemic views of CR. The figure opposite presents the essential differences between these three views. 1: Instrumental enlightened self-interest At the instrumental level, business can and will exploit the huge potential of CR to deliver innovative solutions to business issues that can benefit both companies and the societies in which they operate. Action at this level is entirely consistent with the teachings of the market economy. Companies will reap benefits for themselves and their shareholders by delivering benefits to other members of society, especially their customers, employees and other business partners. For a long time we have seen the financial gains that come from better environmental management. Reducing energy consumption and using scarce resources more efficiently can save organisations money and will benefit the planet. It is undeniable that business continuity will always demand attention to sustainable

3 DEFINING CR INSTRUMENTAL environmental efficiency innovative relationships win-win partnership NORMATIVE societal pressures voluntary codes rules, regulations and restraints SYSTEMIC addressing fundamental global economic environmental and social challenges rethinking business and society development issues. Unilever, for example is collaborating with the World-Wide Fund for Nature (WWF) on the preservation and management of fishing grounds. On the social side, BT recently announced the results of some very careful research that shows its CR activity has a positive effect on satisfaction levels among residential customers. This increased satisfaction among the company s 19 million domestic customers has a direct impact on corporate reputation and one would imagine this feeds through to better financial results. At the instrumental level of CR it can be demonstrated that both business benefits and social gains are delivered through a win-win strategy. However, this essentially relies on the enlightened self-interest of business and it is doubtful if it will address some of the bigger issues facing society today. 2: Normative rules and regulations At the normative level, business is also subject to the rules and regulations set by the legislative framework of the countries in which it operates. For example, in the UK proposals for the modernisation of company law suggest that company directors should consider the effects on the environment and other stakeholders in the creation of economic benefits for the company and its shareholders. This is a welcome innovation even though it falls short of what is necessary, since in principle it requires directors to always prioritise the long-term interests of the shareholders. In the long-term we believe that the interests of shareholders and other stakeholders are often the same, but not always. Certainly, in the short-term, there are many examples where they are in conflict such as when companies are in serious financial distress. That directors should prioritise shareholders concerns is not in dispute, as the company is typically run at the financial risk of 21 shareholders. However, more often than not the company is also run at the risk of other...insisting that CSR is merely a voluntary activity over and above legal responsibility is too simplistic.

4 Corporate responsibility who is responsible? 22 stakeholders and society at large. Therefore, by requiring directors to always put the interests of shareholders first, an important aspect of a company s ability to create wealth may be overlooked. Granting a company license to create income for shareholders at the expense of other stakeholders is not wealth creation in any true understanding of the term. In the long-term we believe that the interests of shareholders and other stakeholders are often the same, but not always. We suggest that directors should still have to prioritise shareholders, but also have to consider in good faith the legitimate expectations from society and other stakeholders (which are clearly above and beyond the legal obligations of the company towards society). This good faith provision could be described as soft law since these non-legal expectations cannot be written into legal statute. If they should become hard provisions, we argue that they should indeed be regulated by law, as they are then clearly areas of real conflict between different stakeholders, which is the realm of government. However, by clearly articulating to directors that they are expected to consider these soft legitimate expectations, developed economies may avoid the need for hard regulation in the future providing directors are generally responsive to such provisions. In many countries it is clear that regulation is also being put forward to forge more transparent business dealings, not just regarding the financial impacts of companies but also in social and environmental areas. For example, in France the government recently announced that all major listed French companies will be required to take into account the social and environmental consequences of their activities in their annual report. The UK company law reform has proposed a similar provision that would require listed companies to prepare an Operational and Financial Review (OFR) which should contain information about the performance of the company, not just in financial matters but also regarding social and environmental matters. In Denmark, the reporting regulation on companies is a step ahead of the UK or France. A new corporate reporting act effective from 2002 provides that all Danish companies have to prepare OFRs in their annual report which give true and fair information to a wide range of stakeholders to inform their economic decisions about the company. This information also has to be audited. In the United States, there is also the Sarbanes- Oxley act signed into law by President Bush in July 2002, which introduces stringent laws on corporate governance. Corporate governance is clearly on the agenda of European governments too certainly in continental Europe many leading thinkers see this issue as central to the CR debate. This is in line with the tradition in many continental European countries where employees have a formal role in the governance of companies through mandatory representation on the supervisory boards. More frequently, we are seeing issues of corporate governance being regulated by soft law the production of codes, guidelines or recommendations rather than hard legislation. This type of soft law is becoming increasingly popular in relation to managing and reporting on CR issues. Often this approach promotes one particular issue and thereby many of these codes, guidelines and recommendations are competing with each other. This is confusing for companies and other stakeholders and therefore may be counterproductive discouraging the take up of CR among the wider business community. However, we believe that this soft law approach is a

5 direct function of governments defining corporate (social) responsibility as a voluntary activity. The point is that governments across the globe are intervening by imposing regulatory requirements on business to behave responsibly. Governments need to acknowledge this and recognise that corporate responsibility cannot simply be a voluntary activity over and above the legal requirements they impose on business. 3: Systemic rethinking business and society However, even if governments were to begin to reformulate their thinking on CR, some would argue that this might not be enough to address the difficult issues facing society today. These are the broader systemic economic, environmental and social questions of the 21st century, which were the main reasons for the UN hosting the World Summit on Sustainable Development in Johannesburg. Certainly, the challenges are enormous. For example, data from WWF shows that we are already consuming 30 per cent more than the earth s biological productive capacity can cope with. And this is happening when a huge proportion of the earth s population is using minimal resources because of economic under development. On the social side, continuing income inequality is leading to greater social and political unrest. Governments do not have the capacity to guarantee the social and economic outcomes to assure our collective wellbeing. There is a growing recognition that the health and security of society depends on closing the unsustainable gulf between the haves and the have-nots. The plight of the world s most disadvantaged people presents a real challenge for the affluent West. Against this background, many turn to the private sector specifically to multinational companies as they are seen to be the most influential albeit fragmented power. It is often argued that such companies can have very positive impacts for example, through initiatives to improve labour standards or ensure environmental protection across the world. Protagonists suggest that the health and wealth of the planet depends on companies in the developed economies using their massive capabilities and resources to help create and strengthen economic, environmental and social wellbeing. The question then becomes what should society expect the role of business to be? Are we asking business to take on the role of what is legitimately government s responsibility? In simple terms what are the limits of CR? There are no easy answers to such questions. Indeed, the debate has only just begun. There are a growing number of interesting dilemmas facing companies in this area. How should companies reinvent their business in light of these challenges? How can companies see themselves as part of the whole system, continue to generate wealth, and deliver products or services which are profitable but which do not create problems for other people? Very often, this challenge is posed in the following terms: "If you are not part of the solution, you are part of the problem." This combative approach is unproductive, unhelpful and unrealistic. Companies increasingly recognise the issues facing them. They realise that organisations which ignore their social and environmental responsibilities face a competitive...companies are facing a number of fundamental challenges that actually hit the core of their business model, challenging the very proposition that underpins the reason these companies exist. 23

6 Corporate responsibility who is responsible? disadvantage. So, at the systemic level companies are facing a number of fundamental challenges that actually hit the core of their business model, challenging the very proposition that underpins the reason these companies exist. We believe that government needs to reinvent its role. For example, car manufacturers continue to produce sports utility vehicles with powerful engines far beyond the requirements of everyday use. These cars are environmentally damaging and are a potential hazard to other road users. However, manufacturers are simply responding to a competitive demand for such cars from customers. Only recently have some of the leading manufacturers begun to consider how they can reinvent their business to create the conditions by which they can solve customers needs for flexible transportation without incurring these external social and environmental costs. As a result, the debate about CR is moving into new areas and requiring companies to examine the very nature of business itself. Clearly such moves have important implications for what is meant by CR and how companies will embrace it in the future. They also have important implications in trying to define the role of business in relation to government. Reinventing the role of government As business struggles with the complexities of understanding CR at the systemic level by rethinking its role, so too are governmental responsibilities changing. We believe that government needs to reinvent its role. Part of this will involve enacting legislation to create a normative framework that will ensure business behaviour delivers the desired outcomes to meet the systemic challenges facing societies. Governments should also work with business to create the incentives that will encourage companies to take further action at the instrumental level for the mutual benefit of business and society. It is clear that simply labelling corporate (social) responsibility as an activity that takes place over and above legal requirements is a dangerous approach. Much more is required of both business and government if we are to address successfully the systemic economic, environmental and social challenges at the national, European and global level. Quote from Douglas Alexander, former Minister of State for E-Commerce and Competitiveness. 24