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In the social ecosystem corporate social responsibility (“CSR”) mediates between business, government, and civil society. As mediator, CSR provides both theory and practice. It is theory in that it provides principles, standards and benchmarks for business decision-making and it is practice in that it demands structures of action and implementation. In practice, CSR is the zone in which interactions between business and government, business and civil society, and among business, government and civil society exist and unfold in social reality.
The Caux Round Table has provided three inter-dependent sets of ethical principles, one for each of the three main social sectors – business, government, and civil society NGO organizations. Each sector requires interaction with the other two and, therefore, must look not only to its internal requirements for success, but to the needs and concerns of the other sectors as well. The Caux Round Table sets of principles can be found on its website at www.cauxroundtable.org
CSR as a separate intellectual approach to business decision-making and as a set of best practices emerged in the mid 1990’s. Its appeal grew as a response to concerns over how to control the negative externalities of capitalism after faith in government regulation of wealth creation collapsed with the fall of the Berlin Wall and the end of Communism. CSR was advanced by its first advocates as a process for the internalization into the business enterprise of social concerns and interests. As such, CSR fulfills a necessary role in modern, post-industrial society where the social processing falls under three distinct spheres of productive activity.
First, government provides public goods, including the remediation and reduction of public “bads.” Second, private enterprise or business produces material wealth for consumption. Third, values, norms, and other cultural standards are devised, set and advocated by civil society institutions from the family to the church and NGO activists.
The interaction of government, business and civil society with balance and harmony and without abuse of power is a state of social justice. The following chart helps us understand the interactions of these three primary sectors and therefore guides us to a more clear understanding of the role of CSR.
This chart presents the three sectors of modern society as dynamic forces that can tend towards social justice or, when they forget to use their powers as responsible fiduciary stewardship, towards conditions of injustice. When government oversteps the line and come to abuse its powers, there tyranny and corruption begin. When business oversteps that same line of unthinking concern for others, negative externalities are imposed on other parts of society, including of course the environment. When NGOs fail to meet the standards of responsible conduct, social capital erodes, undermining both good governance and responsible business practices.
CSR theory and practice keeps business within the zone of responsible fiduciary stewardship, moving the social contributions of business towards social justice.
The chart presents an ecosystem of interactions. Movements within each separate sector play off conditions and changes in the other sectors and, reciprocally, can set off changes in the other sectors. The ecosystem could be in equilibrium, or it could be in a dynamic process of change as flows of innovation move from one sector to the others and, then modified by other parts of the larger system, back into the sector of origin.
Thus, we can map Max Weber’s famous theory of the role of the Protestant work ethic in the rise of capitalism. Change in the civil society sector – a new religious conviction – generates changes in business, which than bring about changes in government that reinforce the key themes of Protestant ministry and action by covenant. More representative government, in turn, fosters the rule of law, protection of private property and enforcement of contract rights, giving new impetus to the emerging capitalist tendencies in the business sector.
The Vectors of CSR Mediation
Now, CSR as a sub-system of the business sector on this chart mediates in several directions. First, it mediates the relationship between business and civil-society. Second it mediates aspects of the relationship between business and government. When the business/government relationship turns to statutory law and the administrative regulation of business, CSR within the business sector has been replaced by public functions of government and business has lost some degree of autonomy. One goal of CSR as a mediator for business is to sustain decision-making autonomy for the private sector. Frequently, as in the current reform response to the October 2008 collapse of financial markets, the subordination of private business to more public regulation to follows such a humiliating failure of CSR thinking in business.
Within business, CSR functions to monitor the relationships between enterprise and stakeholders: customers, employees, owners, other contributors of financial capital, suppliers, competitors, and communities. CSR most robustly understood sets performance goals for stakeholder relationships. Alignment of the enterprise with CSR strategies and management of stakeholder relationships within the moral compass of CSR strategies keeps private enterprise from abusing its powers.
The Forms of CSR Mediation
CSR operates in different modes. There is the mode of theory and analysis; there is the mode of standards; there is the implementation mode of practices; there is the mode of NGO engagement for CSR purposes; there is the mode of CSR evolution within companies.
CSR theories invoke the competencies of academics, consultants and NGO activities. CSR practices are the organizational expression of such theories and other normative realities.
These modes of CSR are contextualized by laws that establish market dynamics and by the supply and demand functions of markets themselves. With respect to markets, CSR both influences prices and, conversely, responds to price signals.
CSR theory arises from many sources of thinking about ethics and business. Most anciently are the wisdom traditions of many religions. Human spiritual needs set forth moral norms on the good life and on the role of virtue. One thinks perhaps most readily of the Golden Rule, known in various analogous forms to most major religious traditions. Or, the gospel saying of Jesus Christ on not trying to serve both “God and Mammon”.
In this religious sphere we find the advocacy of Confucius on virtues of propriety and righteousness, the teachings of Buddhism on the illusory essence of material possessions, and the guidance of Qur’an that humans are to be servants of God (khalifah) seeking to bring benefits to his creation and not to take from others for the self.
Appearing in a quasi-religious format, we can trace CSR concerns for minimizing the negative externalities of business to social disdain for the vulgar, the unrefined bourgeois arriveist, and the crassness of mercantile greed and the profits of financial usury. Early socialism in England and France, Dickens’ savage stereotype of Ebenezer Scrooge before his spiritual conversion, romantic poets and early bohemians, and church based campaigns for moral reformation all contained more than a hint of aristocratic disdain of mere truck and barter as the best way to make a life.
From a more secular perspective, nineteenth century and later efforts to invoke state power in restraint of free enterprise provided themes for subsequent CSR normative advocacy. Consumer protection, unionization, anti-trust prohibitions, regulation of charges and fees, disclosure of information about securities invoked law to push certain negative social consequences of business back into the internal workings of enterprise.
During the 1980’s in the United States, the discipline of business ethics emerged in leading business schools to provide a moral formal theory for the integration of these social concerns into core business decision-making. The academic enterprise of business ethics was primarily Kantian, searching for over-arching normative standards by which to restrain the more traditional short-sighted focus on profit as the criterion for measurement of business success. The discipline of business ethics, therefore, pitted itself in figurative mortal combat against the far more quantitative disciplines of finance and accounting.
In a famous response to the initial demand for business ethics, Professor Milton Friedman and his colleagues in the University of Chicago Economics Department and law school argued, in essence, that the only moral obligation of a business was to make a profit. Concern for management of externalities was the business of government. If certain lines of business activity were found objectionable, then the proper remedy was to regulate against them in hindsight. In terms of the above chart, the Milton Friedman approach was to seal off the sector of business as much as possible from penetration by civil society and from government. The undertaking of this stance was to minimize CSR engagement and maximize private sector autonomy. This stance turned to market pricing mechanisms to produce optimum social outcomes from business.
The Kantian approach, however, proposed the stakeholder theory of enterprise. In short, the theory of the firm was revised into a more complex system. The enterprise was to be seen not as a legal entity closed to outsiders under its own economic sovereignty resting on its own financial capital with command and control of its employees and in adversarial relationships with customers, suppliers and investors. The new stakeholder theory of the firm proposed that any large firm was really more of a de-facto partnership of investors, customers, employees, managers and suppliers, with more junior partners in the community and a circle of dependents that included the environment and competitors.
Environment activism starting in the 1970’s provided additional intellectual support for a CSR approach both as company actions came under review and criticism and as the importance of environment sustainability was more persuasively advocated.
Parallel to this was the creation of social responsible investing in the United States, where companies were screened for, in the minds of some, unwholesome activities such as doing business in South Africa under conditions of Apartheid, making weapons or liquor, producing nuclear power, polluting, complicity in human rights violations, etc. These concerns for impacts on stakeholders measured not in financial, but in moral terms, created an heightened consciousness of doing business with regard for non-financial metrics.
CSR, or a moral, capitalism as against Social Darwinist “cowboy” capitalism in the United States emerged as an explicit theory during the 1990s in the European Union.
However, none of these approaches rested the case for CSR on financial analysis.
At the end of the day, if CSR does not embrace financial drives it will not rest securely within the business sector, but will be only intrusions imposed from the other two sectors. Thus, CSR theory needs to find a home in financial analysis in order to mediate successfully the intersections of business with civil society and government.
Financial Value Based CSR Theory
To overcome past limitations imposed by partially developed theories of CSR, I suggest that valuation analysis from investment theory be adopted for CSR purposes. In this way, CSR variables, which are primarily non-financial, can be integrated into mainstream approaches to doing business as the rational for certain important best practices. Using this approach to thinking about CSR and to practicing CSR equips CSR practitioners to optimize the mediating functions of CSR in the context of profitable business, just public governance, and a robust civil society.
Valuation theory uses as a principal theoretical approach to maximizing the economic value of an enterprise an estimation of future earnings, discounted back to the present as a net figure of potential profits. Then, the net figure is multiplied by an amount that represents the opportunity cost of buying that stream of future income. A high multiplier indicates a belief that the quality of the future income is good, that the probability of its actually being earned in the future is high while a low multiplier indicates doubt about the future earning capacity of the firm. A high multiplier justifies paying a high price for the company; a low multiplier, conversely, a low price.
Such valuation analysis includes estimates of risk in two places: first in estimating the probability that prospective future income will be actually received; and, second, in selecting the multiplier that determines the total value of the enterprise. In the first case, high risk reduces the present net value of future returns and in the second case high risk lowers the multiplier.
In most every case, the components of risk are the intangible relationships of the firm with its stakeholders: future customer loyalty, future brand equity; future access to capital, future productivity, creativity, loyalty of employees; future conditions of government regulation, etc. These stakeholder relationships constitute the core of CSR concerns. Stakeholder relationships are the action arms of CSR mediation between a firm and its socio-political environment. Best CSR practices lead directly to better, more profitable, less risky, more sustainable relationships with stakeholders. Using best CSR practices, therefore, reduces enterprise risk and so raises current and future valuations.
In my book Moral Capitalism, I also proposed a theory of the firm that breaks the concept of firm capital into 5 separate components: reputation capital, social capital, financial capital, human capital and physical capital. Each source of capital is necessary for continued firm success. Each form of capital is bound up in stakeholder relationships.
Reputational capital and brand equity depend on customer preferences, employee quality, and management strategic planning.
Social capital depends on firm culture, core values of leadership, quality of management, and internal human relations functions. From the outside, the social capital of a firm depends on the social capital – education, work ethic, corruption or the lack, physical infrastructure, health and sanitation – of the society in which the firm must recruit, manage, buy and sell.
Human capital depends on employees – productivity, loyalty, attitudes and morale.
Finance capital is a derivative function of reputational capital, social capital and human capital. And physical capital is acquired with financial capital.
Thus, stakeholder relationships drive any firm’ ability to raise capital and so to function on a sustainable basis. In the 2008 collapse of financial markets, Bear Stearns and Lehman Brothers ran out of reputational capital before they ran out of working capital. But their inability to access working capital at the end was a direct result of loss of confidence in their business model on the part of potential creditors. And, their loss of reputational capital arose from a degraded social capital where a culture of excessive risk taking, short term borrowings, high leverage to cover trading speculation, and large bonuses for senior managers lead to illusions of profitability.
At this level of theory, CSR provides mediation of the relations between business, on the one hand, and government and civil society, on the other, by giving business the conceptual and planning apparatus to incorporate in a timely and rational fashion the relevant concerns of the two other sectors.
It should also be noted that CSR theory is a place of conceptual mediation among the three sectors. The ideas and perspectives, suggestions and conclusions, which shape the evolution of CSR theory and form its intellectual structure, meet at an open intersection of the three sectors. Business, civil society – through academics and NGOs in particular – and government – both bureaucrats and politicians, launch points of CSR thinking which can be appropriated, considered and refined by the other sectors. CSR thinking is not a monopoly of business people.
What is proposed by civil society is qualified by business experience and requirements; and what business proposes as its goals and objectives is qualified by advocates from civil society and by those in or seeking public office.
At the conceptual level of standards which are the first step in moving from theory to results on the ground, there are a number of well-recognized models.
The CERES Principles for the protection of the environment were published in 1989 in response to the oil spill occasioned by the ship Exxon Valdez of the coast of Alaska.
The first comprehensive set of principles for business proposed by business leaders were was the Caux Round Table Principles for Business of 1994.
The Caux Round Table Principles were introduced to the Office of UN Secretary General Kofi Annan in 1998. In 1999 Secretary General Annan announced the need for a set of standards to improve the outcomes of globalization. In 2000 the United Nations proposed a Global Compact for the voluntary ratification by private firms, labor unions, and NGOs. The 9, now 10, principles of the Global Compact were derived directly from international agreements among governments: the conventions on human rights, the international labor convention, the Rio Declaration on the environment, and, most recently, the UN Convention Against Corruption.
The OECD proposed guidelines for multinational companies and standards for corporate governance. The National Association of Corporate Directors in the United States has proposed 10 standards for good corporate governance. Social Accountability International created the SA8000 set of detailed workplace conditions as requirements for responsible factories out of a concern to protect workers in manufacturing plants around the world.
A number of industry codes of practice, among others, have been proposed and adopted as part of the contemporary CSR movement:
These principles and codes provide decision-making guidance and highlight priority considerations that private companies need to include in their market-driven calculations of investments and expenditures. Such principles and codes take non-financial concerns, goals and objectives of concern to various sets of direct or indirect stakeholders and require that they be factored in to for-profit decision-making. This integration of stakeholder concerns with internal rate of return calculations by business is a mediation function of CSR.
At the level of practice, CSR provides mediation between business and the sectors of government and civil society in shaping concrete actions that impact business, government and civil society. Using CSR practices, business may act to improve its stakeholder relationships. It may cooperate with government or NGOs to find solutions to environmental, cultural, or social problems. It may engage with stakeholders in non-market forums to learn of their needs and concerns. Under CSR business will consider its products and services to minimize negative externalities and find appropriate opportunities for value pricing in specialized niche markets.
Using best CSR practices, business will selectively obtain from government and civil society optimum support for its operations.
Next, CSR practices will guide allocation of funds by business through charitable commitments to the arts, education, culture and social needs meeting the financial requirements of civil society and NGOs.
A key CSR practice is the company code of conduct or statement of core values. The related CSR best practice is to align company strategic planning, key performance indicators, and rewards for successful performance with its core values. ENRON is now a famous example of a company which had an admirable company code from the perspective of CSR theory but which dishonored those values in practice. On the other hand, Johnson & Johnson in its recall of Tylenol gave us a famous example of a company that lived up to its credo even at a substantial short-term financial cost.
Key to the implementation of CSR principles, standards and codes of conduct is the commitment of the company’s leadership to alignment with core values. In public companies, this must be the board of directors. In private companies it is more the owners who have direct authority over the decisions of the firm. In the public company, the board has the ultimate responsibility for setting and enforcing company values, starting with its selection of a chief executive officer. It is then the responsibility of the chief executive to lead based on those core values and to manage by ensuring the overflow of those values down through the ranks of the organization.
CSR practices emphasize the task of the executive as execution of values as the “glue” that holds the voluntary cooperative structure of a private firm together. The chief executive must be more than a boss or a facilitator of teams and managers; he or she must lead from vision and values.
In this role as values leader, the CEO serving an enlightened board of directors is directly concerned with the interfaces between the company and the society. Mangers may focus primarily on concerns internal to the company but leaders must be vigilant to know what is going on in the wider environment on which the company depends for its profits. Such management of these interfaces is a mediation function for business with government and civil society.
Another level of CSR practice is compliance and risk management within the business enterprise. Compliance is necessary to insure alignment of actions with core values and stated rules and policies. Comprehensive risk management alerts business leaders to frictions between business and the other sectors. Mis-management of stakeholder relationships, including environmental footprints, creates difficulties and possible losses for business. Thus, risk management must embrace non-financial contingencies as well as more narrowly focused market based mistakes in pricing and the offering of in appropriate products and services.
The collapse of major banking houses in the financial crisis of 2008 revealed in dramatic and surprising fashion the consequences of poor risk management. Banks for example in Canada, Australia, Thailand and Singapore were less affected by the financial crisis due to different risk management practices.
The Caux Round Table provides its Arcturus risk assessment process to enable better comprehensive risk management.
Finally, within the realm of best CSR practices is reporting. Both government and civil society are less trusting of business and less comfortable in meeting business needs when business is secretive and opaque. Reporting of results – both financial and non-financial – is an important mediation function by which business can maximize its claims on the other two sectors. Triple-bottom line reports, sustainability reports, or “people, planet, and profits” reports have been commonplace among large multinational companies as the reporting format that includes important non-financial information. The Global Reporting Initiative provides a framework for reporting of data on the environmental and social footprints of business.
Within the business sector, consultants from accountants, risk management experts, CSR professionals, and those who help research and write CSR reports provide human resources for the implementation of best CSR practices.
CSR expressed within Civil Society
While CSR practices are limited to implementation within the business sector, CSR theory can be helpfully enhanced by contributions from civil society. Academics within business schools through teachings, publication and participation in workshops and conferences have provided and continue to provide thought leadership about CSR theory, principles and practices. Journals such as the Journal of Business Ethics and Business Ethics Quarterly feed ideas and concerns into the public domain. Conferences and workshops promote discussions and review of research data with the participation of thought leaders from all three sectors. Professional organizations of academics like ISBEE, International Society for Business, Ethics and Economics, and EABIS – European Association for Business In Society, host important conferences. CSR and ethics centers at the University of Santa Clara, at Bentley College, the Boston College Center for Corporate Citizenship, or the Doughty Center for Corporate Responsibility at Cranfield University in the UK, sustain continued conversations about CSR theory and best practices. For profit efforts such as Ethical Corporation Magazine bring more attention to CSR concerns and management alternatives.
In the United Kingdom the All Parliamentary Committee on CSR provides a link between academic views, business perspectives, and parliamentary discussions of business as a social sector.
NGOs such as the Caux Round Table, CSR Europe, Accountability 21, The Aspen Institute Program for Business and Society, CSR Wire, Business for Social Responsibility, the OCEG, the Business Civic Leadership Center of the US Chamber of Commerce, the Committee Encouraging Corporate Philanthropy, the Institute of Business Ethics in London, Business in the Community in London, Social Accountability International, ALIARSE in Mexico, the Global Reporting Initiative, the office of the UN Global Compact, among others, circulate ideas and best practices among business executives and managers.
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