SUPPLIER AND TECHNOFIN®

Corporate Social Responsibility

Recent years have witnessed increasing importance on corporate social responsibility, especially as concerns about climate change are becoming mainstream.

There have been criticisms of corporate social responsibility from ardent free trade capitalists and anti globalisation activists/environmentalists alike.

The former often feels that anything getting in the way of profits is not a good idea, and that self-interest and pursuit of profit will ultimately lead to the market making these improvements anyway (the “hidden hand”).

The latter often feels that companies are using this to repair tarnished images or otherwise paint a rosier picture of their practices while not addressing fundamental issues.

Many from these and other perspectives, however, are trying to make corporate behavior more responsible when it comes to ethics, working conditions, environmental sustainability, etc.

Ranking countries on their commitments to corporate social responsibility

The Responsible Competitiveness Index (RCI), from the British non-profit, Accountability, and Brazilian business school, Fundação Dom Cabral, looks at how countries are performing in their efforts to promote responsible business practices.

The 2007 index looks at 108 countries covering over 96% of global GDP, with geographical representation on all five continents.

Responsible Competitiveness Index, 2007, top 20
Country	Rank
Simon Zadek, Alex MacGillivray, Editors, The State of Responsible Competitiveness 2007: making sustainable development count in global markets, AccountAbility, July 2007
Sweden	1
Denmark	2
Finland	3
Iceland	4
United Kingdom	5
Norway	6
New Zealand	7
Ireland	8
Australia	9
Canada	10
Germany	11
Netherlands	12
Switzerland	13
Belgium	14
Singapore	15
Austria	16
France	17
United States	18
Japan	19
Hong Kong, China	20

A common criticism is that advanced economies have often moved their more dirty industries to other parts of the world where there are less stringent environmental and social standards.

As a result, other countries may be polluting on their behalf, and these indexes do not factor those in.

This “Pollution Haven Hypothesis” has been raised as one reason the US does not want to participate in Kyoto because China and India will be exempt from emission caps and some domestic industries will head there.

Furthermore, China and others have also argued that their centrality in manufacturing for many around the world does not factor this in.
The above report acknowledges the concern of this hypothesis, and notes the following:

For example, a recent study showed that up to 40% of air pollutants in the Pearl River Delta in low-scoring China are directly linked to exports to high-scoring importers across Europe and North America.

Unfortunately, at this stage there is inadequate systematic data across our large country sample to test this hypothesis within the main RCI. …

The data [looked at so far] remains at this stage too weak to test the hypothesis with any confidence. We are committed to doing more work on this issue in future editions.

This hints at the challenge that globalisation has on nation states when it comes to breaking down such figures: some trade is international by scope conducted by multinational corporations, or companies in a global supply chain.

Yet it is nations that are held to account even while businesses and other entities want to reduce national barriers to trade.

This idea has been around for a long time now. In 1991, then Chief Economist for the World Bank Lawrence Summers had been a strong backer of the controversial structural adjustment policies.

He wrote in an internal memo: Just between you and me, should not the World Bank be encouraging more migration of dirty industries to the LDCs [less developed countries].

The economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable, and we should face up to that… Under-populated countries in Africa are vastly under-polluted; their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City.

The concern over an agent that causes a one in a million change in the odds of prostate cancer is obviously going to be much higher in a country where people survive to get prostate cancer than in a country where under-five mortality is 200 per thousand.

Europe at forefront? China: Make or Break?

Gil Friend, a leading environmental management consultant notes that Europe and Japan are key areas leading on this issue, and notes that China is where the game is either “won or lost”; that is, with China’s rise.

It may consume too many resources with rapid growth, or, as many signs have shown, it will be embracing sustainability trends are difficult to ascertain he notes, but China will be key:

As an aside, “China-bashing” is increasing in the West, as China rises. Some of the concerns are genuine, while others hide political agenda. Common criticisms are over areas such as human rights, environment, and labor standards.

As Chinese enterprises expand overseas, especially in Africa, criticisms of exploitation are increasing.

As the Chinese economy grows and in some areas wages are rising, those people are able to demand better conditions, which are slowly improving.

Companies are therefore finding other ways to be competitive, and that sometimes includes sustainable and responsible practices.

Corporations Should Only Aim for Profit?

Ardent supporters of free markets, such as Milton Friedman, have long argued that companies should not be diverted from their pursuit of profit.

It ultimately harms a free society if entities such as companies try to act for a wider good other than its own self-interest, because it is hard to know what the wider good is, and damages the primary goal of companies: responsibility to shareholders.

In his book, Capitalism and Freedom, Friedman argues that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”

His theories are appealing, though unfortunately in the real world, many companies, larger ones in particular are often involved in exploitative practices of some sort, knowingly or unknowingly.

Furthermore, with their increasing financial muscle comes increasing financial power in the political arena to influence policies in their favor.

This is not necessarily engaging in open and free competition (some lobbying is often to actively prevent competition, for example).

Given the immense impact businesses can have on people’s lives, and their increasing power, environmental, human-rights, and social justice activists have tried different ways to get businesses to be more accountable for their actions.

They have tried to go through their government and even to businesses and shareholders themselves to urge better responsibility.
As a result, many business leaders have therefore tried to pursue corporate social responsibility practices, or attempted to.

Corporate Greenwashing?

But how successful has corporate social responsibility been? In an interview Dame Anita Roddick one of the initial architects for the idea of social responsibility by businesses argues that the original principles have been diluted.

Governments and businesses have become too obsessed with profit and economic growth.

Ultimately, she feels, it has not worked.
Others feel that the situation, while far from perfect, is increasing. Gil Friend talks about such potential progress in another interview.

For example, Amory Lovins, energy consultant and co-author of the incredibly optimistic and insightful Natural Capitalism has been using the idea of entire system efficiency to companies in each sector to help them create a competitive advantage, hoping to create incentives for the others to follow suit.

Anup Shah
The Global Issues

Entry Filed under: SUPPLIER AND TECHNOFIN®, Legal & Regulatory Issues, Compliance, Socially Responsible Investment