The Caux Round Table ("CRT") Principles for Business were launched 20 years ago this past week.
In retrospect, after the collapse of Communism and socialism as viable alternatives to capitalism, the CRT Principles were the first rigorous intellectual advance in the understanding of how free markets and business enterprise could more comprehensively succeed from the perspectives of human flourishing and social justice concerns.
The Japanese, European and American business leaders who authored the CRT Principles in 1994 innovatively raised the level of practical expectations for the outcomes of capitalism as an economic system, one taking into account the relevant demands of civil society and achieving sustainable prosperity.
The CRT Principles were presented to U.N. Secretary General Kofi Annan. Several years later, his office sponsored the Global Compact, by which companies and other private sector organizations could pledge their support for nine goals (later ten) set forth for governments by international treaty commitments among sovereign states.
Georg Kell, Executive Director of the U.N. Global Compact, once told me that the Secretary General's office did not adopt the CRT Principles because of a fear that such principles had no authority behind them, giving them no claim on the conscience of decision-makers. Instead, he and his colleagues decided to use aspirations for government-provided entitlements, which had behind them the legal authority of the treaty-making process under international law. The provisions of the Global Compact were taken initially from international agreements on working conditions, the environment and human rights and later, on elimination of corruption.
But, this public relations anxiety to find proper authority overlooked a long-standing understanding about morality and ethics. It is an axiom of moral philosophy that the state does not create human moral imaginations and cannot be the ultimate judge of ethical reasoning. To the contrary, the state and its laws are subordinate to the moral and ethical visions of the community which sustains them.
Moral propositions and ethical duties do not need government to be true. They are selfjustifying, given cultural, religious and philosophical beliefs. Moreover, human dignity demands freedom of conscience and rejects out of hand any subjugation of the person to coercive political indoctrination.
Thus, at the suggestion of the late Thomas Dunfee, former Professor at the Wharton School, the CRT subsequently investigated important sources of moral imagination and ethical reasoning - our many wisdom traditions - as to how they validate the CRT Principles. The results of these studies are available on our website at: http://www.cauxroundtable.org.
The supreme challenge of business ethics and corporate social responsibility ("CSR") is to integrate moral and ethical perspectives directly into the decision-making metrics of owners and managers.
The CRT Principles accomplish this integration through consideration by business decisionmakers of stakeholder constituencies, perspectives not included in the treaties drawn upon by the Global Compact.
The desire to apply concern for stakeholders to business decision-making emerged in the drafting of the CRT Principles from overlapping judgments central to three ethical visions.
First, Canon's then CEO, Ryuzaburo Kaku, put on the table the Japanese naturalistic concept of Kyosei. Kyosei presumes that where living, natural systems thrive, they are in mutual interdependence so that the success of one sub-system turns, in part, on its beneficial relationship with another source of energy or protection.
Secondly, Jean-Loup Dherse of France then proposed the ethical standard of human dignity as a supplement to the obligations inherent in living with the sustainability and success possible in Kyosei environments. This ethical standard he took from the recently issued Papal Encyclical Centesimus Annus of Pope (now Saint) John Paul II.
Thirdly, Americans added to the intellectual mix of ethical considerations the fiduciary responsibilities inherent in good stewardship, where those who can make a difference in the lives of others are charged with taking due care in their actions.
These three ethical precepts fit rather easily together to frame the CRT’s Principles for Business as released to the public in July, 1994.
Later, the Global Compact would sponsor the Principles of Responsible Investment ("PRI"), which moved closer to the CRT’s understanding of how to change capitalism. The PRI effort placed its emphasis on the environmental, social, and good governance ("ESG") outcomes of business. It issued a demand that investors apply analysis of these factors, in addition to traditional profitability metrics when making investments to encourage companies seeking funds to commit to seeking better ESG outcomes. Many investment firms have thoughtfully agreed to this recommendation.
Following publication of the CRT Principles and alongside the launch of the Global Compact came the Global Reporting Initiative ("GRI"), which sought to solve a different problem in oldschool capitalism. The GRI project sought to invent new data collection points and related reporting formats for private sector firms. The GRI’s intended contribution to a new, more socially responsible capitalism was to elevate awareness of the non-financial impacts of business on society and the environment. The GRI initiative proceeded from a critique of capitalism that highlighted its myopic fixation on financial returns, especially short-term financial results. The GRI patrons proposed that by highlighting other results of operations, company owners and managers would first reflect on a wider range of outcomes contingent on their business decisions and then make their decisions with a view to improving their company’s impacts on society and the environment.
But, a serious challenge to the GRI project lay in a disconnect between its suggested data points with any public scheme of moral or ethical redemption of greed, which might intentionally and fittingly intersect with free markets and private sector wealth creation.
The GRI looked at data which only hinted at, but did not specify the exact dimensions of a new strategy of cultural purpose for business. The GRI project opened the door to confusion as to which data points and which social and environmental concerns should have priority for a business firm. Not every fact could deserve pre-eminent consideration and not every concern could be given top priority. The GRI data points are not self-evidently germane to many business decisions. The GRI reports have become extensive, but not trenchant or indispensable for investors and business executives.
Yet, a simple association of data with stakeholder constituencies, as is required by the CRT Principles, provides for the exquisite materiality of some facts over others. Data that provides insight into the quality of a firm’s management of its stakeholder relationships is material data for its owners and managers.
Thus, the CRT drafted a different approach to CSR reporting based on the prior success of the Quality Movement. The CRT approach is to assess business results from the perspective of stakeholder interests. This assessment and reporting process is the Arcturus management improvement system.
In the 2004 book Moral Capitalism, the CRT Principles were provided with policy frameworks in moral philosophy, macro-economics for the system of capitalism and micro-economics at the level of the firm. A new theory of the firm was suggested, one that incorporated the dynamic of Kyosei and stakeholder engagement as the high road to sustainable profitability in capitalism.
This CRT approach to re-designing capitalism was validated by the European Commission in 2011. The Commission then selected a new definition of CSR as "The responsibility of enterprises for their impacts on society."
The Commission continued, as if it were following the conclusions of Moral Capitalism, that "To fully meet their corporate social responsibility, enterprises should have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders, with the aim of: maximizing the creation of shared value for their owners/shareholders and for their other stakeholders and society at large and identifying, preventing and mitigating their possible adverse impacts."
It seems that the CRT leaders really did get it right at the start of the modern CSR movement.
The CRT approach to CSR as proper management of stakeholder relationships has been further validated in practice by codes of conduct adopted by many industries, such as the coffee code of conduct, electronic industry code of conduct, jewelry industry code of conduct, Wolfsburg Principles on money-laundering for the banking industry, the SA 8000 code for employee working conditions in factories and the responsible care initiative of the chemical industry. Even the dairy industry in the United States has recently adopted a code of best practices.
A second challenge confronting the GRI experiment lay in integration of non-financial with financial data in order to assess the successes and failures of free market private sector investments. New initiatives arose, especially the Sustainability Accounting Standards Board, to consider integration of both sets of data into one comprehensive reporting framework.
The CRT solution to this conundrum was inspired by the failure of asset valuations, which led first to the asset bubble in sub-prime mortgages and then to the collapse of global credit markets in the fall of 2008. Misleading over-valuations at first attracted heedless buying and excessive leverage in the bubble phase of the unsustainable dis-equilibrium of financial markets and then caused the collapse in market confidence when their shortcomings were finally exposed in the recession phase of the dis-equilibrium. More accurate valuations from the start would have avoided much of the dis-equilibrium, during both its up and its down swings in asset pricing. More accurate valuations could have been derived from use of more comprehensive, stakeholder-focused, valuation methodologies.
In several global dialogues after the 2008 collapse of financial markets, the CRT developed an approach to valuation derived from its stakeholder approach to CSR.
The CRT proposed that stakeholders actually constitute assets and/or liabilities of a firm. Good stakeholder relationships can be booked as intangible firm assets leading to future revenues. Careful and considerate management of stakeholder relationships lowers future risks and by so doing, increases both the calculated net present value of the firm and the multiplier used to determine the present capital value of the firm. Under the CRT formula of moral capitalism, good ethics becomes good business.
The new CRT thinking on lessons learned from the crash of 2008 and on valuation as the necessary focal point for integration of stakeholder relationships with traditional profit and loss analysis will soon be available in a new book, The Way to Moral Capitalism, which the CRT will publish as an ebook in a few months.
Stakeholder relationships constitute an important part of the intangible goodwill associated with the calculated capital value of the firm. This new understanding of success in capitalism calls for new emphasis on balance sheets. Accounting rules for balance sheets now need to be revised and expanded to take account of intangibles and better valuation analysis. This permits shifting the benchmarks for success in capitalism from profit and loss statements to balance sheets. Profit and loss statements consider only past activity as it bears upon short-term results. Balance sheet thinking, on the other hand, considers long-term perspectives on the overall capital value of the asset, which is the firm – is the firm getting more or less valuable?
Thus, the innovative leadership shown by the CRT with the 1994 publication of its Principles for Business has continued over the 20 years since then.
The CRT’s 1994 proposal that ethical and moral principles should have a leading role in capitalism had an oft-overlooked implication for business leaders. Principles remove the center of gravity in good decision-making from individuals to ethical reasoning itself, away from positions of organizational command to genuine leadership in action. The locus of leadership is not those who occupy prominent positions, but lies in what they should believe. Principles come alive through thought and reflection. The work of ethics, then, must become educational in many ways.
When principles come to the fore, they provide a standard by which individual decision-makers can be assessed against a moral compass. When principles come to the fore, it is not power that counts, but how that power is used.
Authority is not a personal prerogative, but depends on personal alignment with higher standards of right and the common good. Authority in every organization is held in trust to serve a greater good than self-advancement. Leadership is an office of ethical responsibility, which is open to anyone willing to do what is right.
Those who hold positions of formal authority may or may not display leadership in their decisions. Though placed in a position of high authority, they may still be ignorant, limited in imagination, too risk-averse, wedded to convention, clumsy, insensitive, self-serving, too easily swayed by base emotions or by socio-pathology or other forms of ego mania.
Inversely, those not in formal positions of senior authority in organizations may yet display informal leadership through their dedication and alignment with principles and good ethics. It is ethics, including moral courage, that make a leader.
It is not the position that confers leadership, but the inner personality.
The CRT Principles lend themselves to open-sourced leadership and rationally based decision-making. They do not ratify hierarchy only for the sake of order, decorum and protocol. They look past formalisms to substance. They stand apart from power and its status quo to facilitate assessment of the use of power.
The continuing work of the CRT is advocacy of principles for the enhancement of leadership rooted in the deepest and most just moral instincts with which our species has been endowed since antiquity and which we now express in many forms of faith and culture.
Such advocacy is as relevant for currently sitting CEOs as it is for members of the Millennial Generation, which will produce the CEOs of the future.