A New Turn for Corporate Social Responsibility

Tiffany Tong

March 5^th, 2008

Introduction

The nature of corporations is to maximize the bottom line regardless of social and environmental consequences, because in an extremely competitive global market, failure to do so will result in forced exit from the market. Therefore, traditionally, the enforcement of rules has been viewed as the only way to protect society and the environment; voluntary corporate social responsibility (CSR) has been viewed as mere lip service that produces no results. However, in this paper, I will explore a new turn in the development of CSR, with a particular focus on a United Nations initiative named the Global Compact. I will argue that to effectively engage corporations to produce positive results, norm setting initiatives are necessary in addition to rule enforcement. Corporate Social Responsibility will not work unless we have both binding international agreements to enforce punishment of negative actions by corporations and positive incentives for innovation.

There are many definitions of corporate social responsibility; the quantity reflects the often disputed and vague nature of the term. Although there is no consensus, there are five generally agreed components: namely social, environmental, economical, stakeholder, and voluntariness (Dahlsrud 2008). However, there is much debate about what constitutes responsibility for businesses in these components. How far should business be required to go? In this paper, I will use the often quoted definition of CSR by the World Business Council for Sustainable Development, updated in 2000: “Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large (Dahlsrud 2008).” It should be noted that this definition does not explicitly include the environment aspect, because the WBCSD separates environmentalism into another category (Dahlsrud 2008).

The rapid increase in the quantity of information, migration, and trade due to globalization, has caused the context in which businesses operate to change also. There is increased attention on the impact of businesses on all stakeholders, and consequently, new expectations of fairer and less damaging practices. In this period of rapid change, definitions of good practices have yet been encoded into international law, therefore leaving many grey areas to be filled (Kell 2005). In order for CSR to not become just “about managing perceptions and making people inside and outside the company feel good about themselves,” businesses now need new ways to optimally balance social, environmental, and economic impacts (Dahlsrud 2008; Frynas 2005).

Changes in the Business World

The strength of corporations, and mostly importantly, multinational corporations (MNCs), have increased dramatically during the last two decades. On one hand, they provide many jobs for impoverished nations and have helped increase the absolute wealth and standard of living for many people (Monshipouri, Welch and Kennedy 2003). On the other hand, they have become so powerful that politicians and governments have to take their interests into account when making decisions, sometimes even over the interests of their voters. Most MNCs have specific lobbying groups to persuade the government to stop or pass legislation in their favour (Frynas 2005). For example, initiatives to lower greenhouse gas emissions have been stopped numerous times by transnational oil companies such as Exxon Mobile (Frynas 2005). As another example: Walmart ranks 23^rd in the world if it were a country in terms of GDP (Barnes 2008); the governments of the countries in the global south that produces goods for Walmart have no bargaining power whatsoever to protect their citizens or the environment. The opening of borders for free trade around the world has ensured that MNCs like Walmart can quickly move to other countries where regulation is more lax for the same price for labour, effectively giving Walmart all the power to dictate the terms of the contract (Barnes 2008).

Moreover, perhaps, most worrisome is that, unknown to many, MNCs control most of our basic needs. Currently, 90% of our world trading of grain is controlled by 5 MNCs (Oram n.d.). Moreover, water, which most regard as a basic right, is the most traded commodity in the world. Many of the world’s population have no access to clean water supply while companies have bought up whole aquifers to bottle up water to ship to those who can pay. In 2000, a multinational corporation, the Bechtel Corporation, privatized the water in the municipal supply of Cochabamba, Bolivia. Residents were not even allowed to touch the water that fell from the sky (Shultz 2005)! Thus, from these examples, one can see that “the key constraint on CSR’s role in development is … the subservience of any CSR schemes to corporate objectives” (Frynas 2005) of maximizing profits without regard of consequences.

Given this much influence and potential for damage MNCs have, there needs to be rules to check their power and make sure they operate in ways sustainable to the environment and societies. Although it may seem that “private actions, media exposure, and lawsuits based on civil law” are “the only practical way to put the pressure on MNCs (Monshipouri, Welch and Kennedy 2003),” these actions seem to have limited effect in some cases. In particular, international regulatory initiatives have often failed to produce results since there is much historical mistrust between the business sector and organizations like the United Nations (Deva 2006; Kell 2005). Some may even go so far as to say that “profit maximizing motives are often incompatible with good development practice” (Frynas 2005), therefore international cooperation to find solutions is fundamentally impossible. On the other hand, without a doubt, large MNCs have been improving: “according to one estimate, global spending by oil, gas and mining companies on community development programmes in 2001 was over US$500 million.” These companies “now help to build schools and hospitals, launch micro-credit schemes for local people and assist youth employment programmes in developing countries (Frynas 2005).” What is promoting this change, if regulations are ineffective? Are there any current initiatives? And how can we help to encourage companies to embrace positive practices?

In general, there are two categories of initiatives that have a visible impact on the way corporations behave: first are the consumer campaigns that aim to raise awareness and thus put pressure on corporations to change their practices; examples include the ban on landmines or the slow food movement. This is the bottom-up approach where concerned citizens and consumers are the ones who initiate and advocate change. Second are the international agreements which exert pressure through international norms. The corporation risks its reputation if violated an agreement and failure to address the issue. These agreements can be voluntary, such as the Global Compact, or regulatory, such as the tobacco convention (Sagafi-nejad 2005). This is the top-down approach where it is the supranational or international organizations that initiate the negotiation and become the regulator. For this essay, I will focus on the top-down approach.

In particular, for the top-down approach, there is a new initiative by the United Nations called the Global Compact. It is generally regarded as the first international voluntary agreement that aims to bridge the gap between the business sector and the United Nations (Kell 2005). I will do a case study on the Global Compact, including its history, mechanics, pros and cons compared to international regulatory agreements, and finally argue that a voluntary approach is superior to a regulatory one in current circumstances.

The Global Compact

The United Nations Global Compact is the brain child of former UN secretary Kofi Annan. As the only secretary with a degree in commerce in the history of the UN, he had a unique idea on how to bring the business community and the United Nations together and a foster a positive relationship (Kell 2005). The Global Compact (GC) started on 26 July 2000 with the vision to “promote responsible corporate citizenship so that business can be part of the solution to the challenges of globalization (Deva 2006)”. It does so by aiming to “internalize the Compact principles as part of business strategy and operations” and facilitate “cooperation and collective problem solving between different stakeholders (Deva 2006).” It was emphasized that the GC will only be voluntary, and is not a regulatory document. Since its interception, the GC has grown to “almost 5, 000 participants, including over 3, 700 businesses in 120 countries around the world (Participants & Stakeholders n.d.).” Some regard the Global Compact as “the world’s largest and most widely embraced corporate citizenship initiative” (Deva 2006) in the history of commerce.

Fundamentally, the Global Compact is “an experiment in cooperation based on market mechanisms that would allow the catalytic effects of critical masses, collective action, transparency and front-runner behavior to set examples and ultimately create behavioral norms (Kell 2005).” It is an initiative to change the way the UN has worked since its interception: a platform to experiment how the “historically hierarchical United Nations” can support “a diffuse, network-based initiative” that would better suit a new, increasingly globalized world (Kell 2005). It is the turn of a new era, where corporations and all the other stakeholders are no longer at odds with each other, but instead discuss and debate in forums so the triple bottom line can be maximized. The Global Compact is a step in this direction; it is certainly not perfect, but it is a promising start of a new model of market mechanisms.

The mechanics of the GC are simple: the GC has a ten principle, which includes human rights, labour laws, environment, and anti-corruption, framework for guiding corporate actions. A corporation agrees to abide by the ten principles, the corporation publishes a public yearly report on their progress regarding the ten principles, and the GC office acknowledges the corporation’s work on their website (The Ten Principles n.d.; Deva 2006). If the corporation fails to communication their progress or violates one of the principles, then their name is removed from the GC website. The GC office also hosts regional discussion and learning forums year round for the heads of the companies (Rieth, et al. 2007). The GC has four engagement mechanisms: leadership (actively promoting the ten principles), dialogues between various stakeholders, learning between companies about effective practices, and outreach/network (providing a platform for action) (Deva 2006).

However, according to critics, no matter how idealistic the Global Compact is, its mechanisms are very weak and ineffective, reducing its participation to mere ‘cheap talk’. For example, there are no independent checks on the companies, there are no large negative punishments (the worst case scenario is that companies get taken off the website), and the companies can withdraw any time they desire. The non-binding nature of the GC allows companies to take advantage of the public relations benefits, but remain unchanged in their operations (Deva 2006). However, if it really is just ‘cheap talk’ why have only 3000 companies out of the 63,834 multinational parent corporations, in addition to 866,119 foreign affiliates, signed on to the Compact (Deva 2006; Bennie, Bernhagen and Mitchell 2007)? If it is really just free promotion, why is there such a “considerable variation” in the number of companies signed among those headquartered in developed nations (Bennie, Bernhagen and Mitchell 2007)? There must be other motives behind signing the compact if we assume companies do not act purely because of ethical reasons.

According to the study “The Logic of Transnational Action: The Good Corporation and the Global Compact,” a few factors correlated with the data about which firms signed the Global Compact. The probability of a firm signing the GC increased with firm size, the firm’s involvement level with the government, the firm’s level of foreign investment, the firm’s headquarter country’s democratic index, the headquarter country’s friendliness with the UN, and the ‘greenness’ of the country (Bennie, Bernhagen and Mitchell 2007). Interestingly, the probability of signing also increased if the firm had fewer “exit options,” such as moving its operations to other countries in the case of an oil company (Bennie, Bernhagen and Mitchell 2007). Thus it is clear that firms gain a lot of ‘soft’ power, or legitimacy, by adhering to the GC principles, in both their countries of operations and internationally.

Another criticism of the Global Compact is that the ten principles are too vague (Deva 2006): what does it mean to “support a precautionary approach to environmental challenges”? How much is precautionary? When there are no international standards, it is impossible to judge whether a company is committing enough to sustainable change to be worthy of being deemed as a global leader. However, I believe that as the Compact gains more international legitimacy, and as international norms start to change according to the Compact’s principles, companies will accept increasingly high standards of regulations. The focus should not be on whether or not the laggards are performing up to standard, but rather on the how innovative the front-runners can be. In a purely regulatory system, the standards would mostly likely reflect the lowest common denominator because it would be a compromise between all the key actors (Kell 2005). Also, it is nearly impossible for the UN to rally for sufficient political support to implement a regulatory approach worldwide on all the corporations (Kell 2005). No one country would be willing to raise the standards high enough due to worries of hurting their economy. As an example, although the UN attempted to regulation multinational corporations through its Code of Conduct, it has only produced “20 years of debate and negotiations” with no results (Kell 2005). But with a voluntary approach like the Compact, the front runners will be the one setting the example, and eventually, the standard or norm.

The Compact is a real life example of how a constructivist approach to power in world politics can lead to concrete changes (Thérien and Pouliot 2006). In a world of increasing consumer awareness, there is increasing pressure for companies to perform sustainable operations. The reputation of a firm is directly correlated with the level of corporate social responsibility it undertakes, and will increasingly affect how much costumers are willing to buy (Thérien and Pouliot 2006). Norm entrepreneurship does have an impact on slowly changing values and practices, however, the question seems to be is norm changing alone sufficient to bring about a truly sustainable business culture?

I believe the answer is no. Currently, there is a gap between local governments and global markets where there is little or no regulation (Kell 2005). As a result, many firms can exploit this gap for the narrow interest of a few at the expense of many. Initiatives such as the Global Compact can only go so far in ensuring everyone meets a certain standard. Therefore, voluntary incentives must be a complementary to enforced regulations to ensure no free-riding (Deva 2006). It is much easier and cheaper for a firm to have good public relations than reconsidering how to balance the environment, society, and profits for every aspect of the company. Therefore, although recognition to bring about good reputations and soft power for deserving firms is essential to change norms, the other firms that are unwilling to change will need to be controled and regulated through a certain level of agreed international standards. Within a state, it is the government’s responsibility to ensure that the corporations do not violate any laws; in an international context, “reliance on state duties alone may not be sufficient to broadly protect human rights” and environmental degradation (Monshipouri, Welch and Kennedy 2003). Thus the responsibility currently falls on the shoulders of the UN.

However, unfortunately, although the UN has a certain level of ‘soft power’ such as legitimacy, it has close to none ‘hard power,’ which renders international law to much talk and no action. The hard power of the UN is difficult to increase because states are reluctant in giving up sovereignty power to a supranational organization. Therefore, the solution for the UN is to find ways to increase its ‘soft powers’. By building a better relationship with the business community and gaining trust from governments, the UN can push for more change without the need of much hard power. Once an idea or standard is legitimatized, hard power used to enforce the standard is regarded as less problematic.

Recommendations

In the future, as norm changing initiatives such as the Global Compact gathers more support, and as norms start to set higher standards for corporate social responsibility, there is a need for the following recommendations:

1. Standards to be set

The standards about corporate social responsibility have to measure “actual output progress, rather than asserted process intentions” (Aragon-Correa and Rubio-Lopez 2007). They have to be clear and well-publicized, so that the transparency and legitimacy commands respect from all parties (Aragon-Correa and Rubio-Lopez 2007). The standards have to be comparable in different sectors and be applicable to all regions of the world. As more companies sign the Global Compact, there is potential for the companies to be separated into different levels according to their commitment and innovation each year with respect to the ten guiding principles. Finally, as these standards are widely accepted with the general business community, they should be codified into enforceable international law, that allows for punishment for failure to comply.

2. Allowing all stakeholders to participate

Currently, initiatives that include different stakeholders are either too weak to affect international norms, or do not include different stakeholders at all, like the Global Compact. It is essential that in the future the Compact includes non-governmental organizations (NGOs), local citizens where they operate, academia, and other parties concerned (Cetindamar and Husoy 2007). They can offer valuable view points to guide the company’s effort to become socially and environmentally responsible. Discussions and debates also ease tensions between rivaling interests, and provide a forum to construct a compromise everyone is satisfied with. In particular, as states are sill the key actors in world politics, it is immensely beneficial to have their support and backing by including government representatives in the evolution of the Compact and similar initiatives. Governments have more ‘hard power’ to enforce rules within their country. Also, they can give more legitimacy to the principles, and can provide much support for promoting new norms.

3. Continuation and strengthening of current practices

First, there must be more encouragement for the model of front runner innovation. Annually, lists of the best socially and environmentally responsible companies in the world, analogous to the Fortune 500 list for top companies, should be published and those at the top should be honoured. These companies should be promoted at commerce schools throughout the world, so that their practices and ingenuity can be learnt by potential members of the business community. Secondly, initiatives like the Compact must continue to localize as well as globalize. Localization allows for spreading of local networks of corporations and stakeholders so that there are more opportunities to share solutions specific to their region and forge useful contacts. On the other hand, globalization is needed to reach out to ever more companies, especially MNCs, to affect a real change in norms. Thirdly, the Compact must take great caution in avoiding to reinvigorating the distrust that is starting to thaw between the business sector and the UN.

Conclusion

For real environmental and social progress, “we will need firms … describe[d] as ‘anticipatory’, ‘entrepreneurial’ and ‘creative’ to anticipate requirements, and especially to lead the process of change (Aragon-Correa and Rubio-Lopez 2007).” As a result, I find that the Global Compact and similar initiatives have enormous potential to achieve its objectives because it fosters and rewards firms with the behaviors mentioned above. The real challenge for corporate social responsibility “is not designing new regulations,” albeit important, but finding ways “to make existing ones effective (Kell 2005).” The method of implementation and how to map out and gain support for its mechanism is the real puzzle supranational organizations, like the UN, have to figure out. I think with the Global Compact and other regulations, the UN has made a very important first step in the right direction for encouraging and enforcing corporate social responsibility.

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