This post originally appeared on The New Global Citizen and is reposted here with permission.
by Paula Luff, founder and CEO of Viso Strategies Corporation
I recently had the opportunity to speak with a group of graduate students about Corporate Social Responsibility (CSR) and my own career in social impact. The discussion was stimulating and the students asked probing questions. After the session, a young woman approached me and said that she would love to have a job like mine and change the world, to give away a company’s money to support worthy causes. My heart sank. In my experience, CSR can be a powerful force to transform corporate culture and align business activities with social benefit. While pure philanthropy remains an important component of CSR, the field has evolved beyond giving. The class had already spent a session or two on Shared Value and Collective Impact. I had spent most of my time in the class discussing the fundamentals of stakeholder engagement and why it makes for good business. What had she missed in my talk? What had I failed to communicate?
With so many interpretations of what CSR is, I shouldn’t have been surprised. A simple Google search of the phrase generates a head-spinning number of hits. So what is CSR and why the confusion? Is it about giving back? Environmental stewardship? Employee engagement? The elusive Triple Bottom Line? Simply defined, CSR is a tool for companies to understand and manage their social and environmental impacts. Well executed, CSR goes beyond risk management and leverages the core value creation of the enterprise to benefit shareholders, employees, and society alike. To quote PepsiCo Chairman and CEO, Indra Nooyi, CSR is “not how we spend the money we make, it’s how we make the money.”
The Profit Mandate Gives Way to Social Compliance
Bowen’s 1953 work, Social Responsibilities of the Businessman, linked corporate ethics and performance, and was one of the earliest references to CSR. Over the past several decades, as the field developed, academics have continued to study CSR in the context of marketing, leadership, and stakeholder engagement. In the late 1980’s and early 1990’s, cause marketing was the leading mode of corporate social engagement, wherein marketing teams developed strategic high-profile partnerships with influential NGOs. Starbucks, for example, partnered with CARE to support high-impact development work in several countries where the company sourced its coffee. The partnership benefitted small-holder farmers and helped position the company as a responsible citizen.
Yet, even in 2016, there are business leaders who fail to see an upside in social engagement, firm in their conviction that the business of business is business. In 1962, the economist Milton Friedman published Capitalism and Freedom, a manifesto of economic conservatism made famous by his essay, The Social Responsibility of Business is to Increase its Profits, published in 1970 in The New York Times Magazine. One of the most-cited critics of CSR, Friedman made clear that the business of business is to produce goods and services, obey laws and regulations, and deliver profits to shareholders. Individuals, he argued, had responsibilities, not firms. Friedman argued that executives are accountable to their employers, the shareholders, and as such, allocating resources to CSR amounts to spending shareholder money without their consent.
Since then, the public’s faith in both public and private institutions has been tested and stakeholder expectations have shifted as a result. The Watergate scandal shocked America to its core, shattering public trust in government. The Exxon Valdez oil spill and the collapse of Enron, among other corporate reputation crises severely damaged public trust in business. How many of us watched the live webcam footage of oil pouring into the Gulf of Mexico during the Deepwater Horizon oil spill? How many of us were shocked when Turing Pharmaceuticals recently acquired and dramatically raised the price of Daraprim, an older drug used to treat rare infections, by 5000 percent? Technology and social media have changed the speed and way people access and use information. While creating shareholder value remains a key imperative, the game has changed. Legal compliance is necessary, but no longer sufficient. A report recently published by Weber Shandwick , Always-On Transparency, captures this evolution in a clear timeline and shows that transparency can pay big dividends and is central to all sectors’ license to operate. In an increasingly interconnected world, transparency helps drive consumer and donor decision-making and people’s trust in government.
Legislative and cultural developments over the past few years have begun to edge CSR from voluntary to mandatory. Consumers look beyond packaging and want to know how products are made and under what conditions. Companies have increasingly turned their attention to responsible sourcing, a cornerstone in many CSR strategies. Supply chains are large and complex and ensuring that all the links in the chain meet social and environmental expectations is a daunting task. Stakeholders have long raised concerns about wages, forced and underage labor, human rights abuses, and working conditions in a range of industry supply chains from apparel to extractives to agriculture. A number of brands have implemented supplier codes, audits and training, but challenges remain. Governments don’t enforce health and safety laws for fear that companies will move operations elsewhere.
Such attention to transparency and supply chain due diligence has become even more of a focus for the manufacturing and extractives industries. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted and signed into law in the wake of the Great Recession to introduce greater transparency and accountability in financial markets. One provision requires extractives issuers to disclose payments to governments. The EU quickly followed suit and issued a directive extending the disclosure requirement to the forestry industry. A number of countries, including Norway, have also passed similar national legislation.
In 2003, the creation of the Extractive Industries Transparency Initiative established a multi-stakeholder effort to promote transparency and accountability in resource-rich countries. While participation is voluntary, seeking to encourage companies to disclose payments to governments and governments to disclose payments received from companies, many companies have used this as a means to comply with various disclosure requirements. The intended result is greater public accountability and more equitable distribution of the benefits associated with natural resource endowments.
Dodd-Frank also requires issuers to conduct conflict minerals due diligence and disclosure if they manufacture, or contract to manufacture, products containing cassiterite (tin), gold, wolframite (tungsten) or columbite-tantalite (tantalum). There is no de minimus threshold–even if tiny amounts of these metals are used, their source must be traced and disclosed. In 2011, California enacted the Transparency in Supply Chains Act focusing on addressing human trafficking. The law applies to retail companies whose annual sales in the state are greater than $500,000. Outside the US, the UK enacted the Modern Slavery Act in 2015. Its Transparency in Supply Chain Provisions require businesses with an annual turnover greater than £36 million to publish an annual statement describing actions they have taken to prevent and address trafficking and slavery in their supply chains. This requirement goes much further than the Dodd-Frank Conflict Minerals provision and applies to all companies and all sectors, not just mining or manufacturing. Human trafficking is a transnational issue that local legislation can only partially address. In an article last July, The New York Times exposed the extent of human slavery in the Thai commercial fishing industry. Weak international maritime laws and enforcement and labor shortages in the sector create opportunities for Dickensian exploitation.
Cross-sector Partnership Provides a Pathway to Proactive Value Co-Creation
Today, firms large and small need to engage with and meet the expectations of a variety of stakeholders–customers, regulators, civil society, employees, and business partners, each of whom has the power to enhance or erode value, which ultimately affects shareholders. Intuitively, good relationships make for good business, and research supports this approach. Witold Henisz and colleagues at the Wharton School studied the impact of stakeholder relations on asset values in a paper entitled, Spinning Gold: the Financial Returns to External Stakeholder Engagement. The authors examined fifteen years of worth of mining companies’ performance and stakeholder incident data and concluded that productive external stakeholder engagement pays off. Moreover, companies that did well in understanding and appropriately intervening in the systems of stakeholder interests that surround their firms significantly enhanced the value of their assets compared to peers who were less successful in building and nurturing positive stakeholder relationships.
It would appear then that CSR, effectively integrated into operations, can do more than limit risk and loss. It can be used as a lead strategy to create value for both shareholders and the public alike. Unilever is probably one of the most advanced among large corporations in embracing CSR as a proactive business strategy. The company’s Sustainable Living Plan aims to grow the business, shrink its environmental footprint, and increase social impact.
Mega-multinationals like Unilever are not the only players in this space. Vestergaard is a private Danish company that has applied its expertise in textiles to address some of the world’s major public health issues from safe, potable water to Guinea Worm and Malaria. The company uses its core business to deliver positive health impacts in communities around the world, while earning a profit, reaping a share of the value of preventing disease. The direct costs of malaria alone is estimated at about $12 billion by the CDC, making the potential economic impact of prevention arguably one of the world’s largest opportunities—in multiple ways.
Safaricom and Vodaphone launched M-Pesa in 2007 in Kenya to help expand access to financial services to the unbanked. M-Pesa now serves nearly 20 million customers in nine countries, offering secure banking services that go beyond telecommunications. While data on economic impact is mixed, M-Pesa has increased the efficiency of money transfers while reducing risk of carrying cash, both of which have the tendency to make commerce more transparent, affordable, and inclusive.
And what about capitalizing on unintended consequences of business activity? While a number of stakeholders oppose offshore oil and gas development, it has long been known that oil rigs attract and shelter a rich variety of marine life. While hundreds of decommissioned rigs have been converted to artificial reefs in the Gulf of Mexico, the practice is controversial in environmental circles and has faced vigorous opposition in places like the North Sea and California. The New York Times recently highlighted the debate in California and the work of scientists who are trying to encourage dialogue and fresh thinking to benefit marine life off the California coast. Fresh thinking! What an example to move past entrenched prejudices and welcome the value of multiple—and diverse—perspectives.
What all of these approaches have in common is a recognition that where there are great challenges, there is also enormous opportunity. The most successful companies understand that they are only part of a complex system within both society and the environment. To better understand and appropriately intervene in those systems, they must enter into partnerships with transparency and positive intent. Several times over the past 15 years, highly regarded NGOs told me that they couldn’t work with my former companies because of the extractive and pharmaceutical industries’ track record in human rights and pernicious reputation. I have also had colleagues who would practically break out in hives at the mere thought of engaging with NGOs or government to co-create social programs that would benefit key stakeholders, which would in turn contribute to the long-term success of the company. Such isolationist thinking is not only unhelpful, it’s counter-productive.
The most successful CSR is not about giving away the money from the fringes of a company’s profit, but instead clarifying and integrating the needs of a company’s stakeholders into the very core of the business. Doing so generates shared value and mutual prosperity, contributing to healthy societies that thrive in healthy environments. Responsible business is the business of business; nothing less is sustainable.
Paula Luff is founder and CEO of Viso Strategies Corporation, a sustainability advisory firm based in New York. Luff is a Senior Associate with the Project on Prosperity and Development at the Center for Strategic and International Studies. She serves on the board of Philanthropy New York where she is co-chair of the Committee on Members.