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BUILDING THE RESPONSIBLE ENTERPRISE
Where Vision and Values Add Value
By SANDRA WADDOCK ANDREAS RASCHE
Stanford University Press
Copyright © 2012 Board of Trustees of the Leland Stanford Junior University
All right reserved.
ISBN: 978-0-8047-8195-4
Chapter One
RESPONSIBLE ENTERPRISE A Systems Perspective
We have to choose between a global market driven only by calculations of short-term profit, and one which has a human face. Between a world which condemns a quarter of the human race to starvation and squalor, and one which offers everyone at least a chance of prosperity, in a healthy environment. Between a selfish free-for-all in which we ignore the fate of the losers, and a culture in which the strong and successful accept their responsibilities, showing global vision and leadership. Kofi Annan, former Secretary-General of the United Nations, in a speech at the World Economic Forum, 19991
CORPORATE RESPONSIBILITY FOR SUSTAINABLE ENTERPRISE
The speech by former United Nations Secretary-General Kofi Annan quoted in the epigraph above sparked a firestorm of interest among executives in attendance. Only one year later the United Nations launched the UN Global Compact as a formal organization. By its tenth anniversary in 2010, the UN Global Compact was by far the world's largest corporate responsibility initiative, with over 8,600 signatories, 6,200 of which were businesses, including many transnational corporations. Annan's words highlight an important and often forgotten reality: business is integrally connected to both the social and ecological contexts in which it operates.
With his statement, Annan signaled new recognition of an important shift in the long-term relationships that businesses can expect to have with their many constituencies—their stakeholders—and with how they treat the natural environment. As businesses have grown larger and more powerful, their attendant duty to be responsible wherever they operate has also grown. Indeed, some argue that the rise of the very term corporate responsibility since the late 1990s came about in part because some companies in the process of globalization began to assume responsibilities formerly assigned solely to governments. Today, expectations that businesses will play constructive and responsible roles in creating an equitable and sustainable society are further enhanced by worries about global climate change, the economic meltdown of 2008 and its ensuing social problems, and the continuing gap between rich and poor, North and South.
Consider the following: during the first ten years of the 21st century, the world was faced with a series of major business scandals and ethical abuses, including the collapse of Enron, a global financial crisis resulting from an increasingly dominant financial services industry that acted more like a gambling casino than your neighborhood banker, a collapsing housing market resulting from deceptive and problematic mortgage lending practices, and the recognition that climate change and a sustainability crisis were no longer impending but in fact present. The gap between rich and poor globally grew wider, in some places resulting in revolution, and in others leaving billions of people to subsist in grinding poverty. Ecologists note that all major ecological systems are in decline—with overfishing, erosion of topsoil, desertification, clear-cutting of forests for timber, burning of rainforests for grazing and cropland, fertilizer polluting rivers, streams, and lakes, and species extinction at an unprecedented rate being only a few of the many ecological problems facing the planet.
Despite the Millennium Development Goals (MDGs) proffered by the United Nations with the intent of reducing poverty, increasing education, and enhancing sustainability in the world, nearly 3 billion of the 7 billion people in the world still live on less than $2.50 a day, 1.1 billion do not have clean water to drink or cook with, and 2.4 billion people have no sanitation facilities. Trust in business, according to many surveys, is at an all-time low—with other institutions not faring much better. The world's public authorities seem unable to move effectively to deal with the sustainability and climate change crises. Businesses are oriented toward short-term maximization of shareholder wealth. "Free"-market ideology has taken its toll on many nations and communities, which have lost jobs and the capacity to be self-sustaining as they tried to enter the global economy. The litany could go on, but is it any wonder that some people doubt that it is even possible for business to be responsible in this context?
Calls for greater business and corporate responsibility—that is, more responsible enterprise: greater accountability, responsibility, transparency, and sustainability—from all types of enterprise are commonplace. Many companies have, in fact, developed significant initiatives around corporate "social" responsibility, which we define as explicit pro-social initiatives on the part of companies. Others have developed major sustainability initiatives or characterize their efforts as corporate responsibility, implying that they are attempting to be accountable, responsible, transparent, and sustainable in their business models and practices. We will say more about these ideas later, but the point is that there is a great deal of activity around responsible enterprise within companies—but still not enough to restore the public trust in business enterprise. Still not enough to ensure that there will be sufficient change to the system to guarantee necessary husbanding of planetary resources, care with social and human "resources," or safeguarding of financial resources.
With this book we offer a roadmap for those who wish to follow the path of responsible and sustainable enterprise; we provide frameworks and arguments for why doing so is not only good business but an imperative for all of us living on earth today. We are, in the end, all in this together.
DEFINING RESPONSIBLE ENTERPRISE
Responsible enterprise is an integral part of the whole corporation as it exists in whole communities and whole societies. Companies are increasingly being held accountable for respecting society and social rights (e.g., by not polluting or otherwise contributing to deteriorating environmental conditions, including global warming), for preserving individual or civil rights (e.g., by providing safe working conditions), and for respecting political rights (e.g., by not operating in countries with governments that do not uphold basic political and individual rights), among many other responsibilities.
The embeddedness of corporations in societies—that is, their existence as socially constructed holons in economic, political, societal, and ecological contexts—means that careful attention needs to be given to how they behave. Sustainability, not just of the company, but also of the earth's capacity to support human life, depends on a systemic understanding of corporations in society, which we develop throughout this book.
If we conceive of companies in terms of their relationships to stakeholders and the natural environment, then we can define responsible enterprise as follows:
Responsible enterprise means that companies live up to clear constructive visions and core values consistent with those of the broader societies within which they operate, respect the natural environment, and treat well the entire range of stakeholders who risk capital in, have an interest in, or are linked to the firm through primary and secondary impacts. They operationalize their corporate responsibilities in all of their strategies and business practices by developing respectful, mutually beneficial relationships with stakeholders and by working to maximize sustainability of the natural environment. They are responsible, transparent, and accountable for their impacts.
Responsible enterprise by this definition involves far more than performing the discretionary tasks and duties associated with philanthropy, volunteerism, community relations, and otherwise doing "social good," which some people think is sufficient and which constitutes corporate social responsibility. This broad understanding of responsible enterprise means paying attention to how fundamental responsibilities—some of which are those traditionally assumed by governments, such as labor and human rights, environmental sustainability, and anti-corruption measures—are being met in all of the company's strategies and operating practices, as well as to the outcomes and implications of corporate activities. Responsible enterprise means developing a "lived" set of policies, practices, and programs that help the company achieve its vision and values.
Adopting such an integrative perspective on responsible enterprise implies not overemphasizing the role of (often isolated) corporate responsibility or corporate citizenship departments, executives, and reports. Real responsible enterprise starts where these measures end. Marc Gunther has made exactly this point by arguing that the traditional focus on the corporate responsibility infrastructure separates a firm's impact on the world from its core business activities. We couldn't agree more! Our understanding of responsible enterprise highlights its embeddedness in the day-to-day practices of all people working for or with a firm. Isolating corporate responsibility may in fact imply also isolating its impacts.
One significant challenge, then, is to stop thinking of responsible enterprise as something that can be "fixed quickly" by adopting the "right" measures (which are usually the same as those adopted by everyone else). This challenge leads us to highlight two significant propositions underlying this book: (1) responsible enterprise is about inspired leadership and living espoused values in a company; and (2) responsible enterprise requires systems thinking—that is, the explicit recognition that businesses are shaped by and influence the larger social and ecological systems in which they operate.
THE CURRENT STATE OF CORPORATE RESPONSIBILITY: DO COMPANIES INTEGRATE?
Each year the UN Global Compact conducts an implementation survey of a subset of its participants throughout the world. The survey is one of the largest and most comprehensive studies of corporate responsibility practices. The 2010 survey compiles more than 1,200 responses from 103 countries. It paints a global picture of corporate responsibility, including the voices of small and medium-sized enterprises (SMEs). The survey attempts to provide an overview of companies' efforts to integrate corporate responsibility into their everyday business activities, with particular attention to activities related to human rights, labor standards, environmental protection, and anti-corruption.
Although the survey reveals that companies perform at very different levels (mostly because of their large geographic diversity), it also shows that corporate responsibility practices are increasingly embedded into value and supply chain activities, particularly those related to the management of environmental issues and labor standards. For instance, almost half of all companies have developed management systems to monitor and evaluate performance in these two areas. Companies seem to have realized that just having policies or codes of conduct is of little consequence if these statements are not integrated into existing business processes. The Global Compact's survey, however, also shows that firms still have a lot to learn about corporate responsibility—in particular, human rights and anti-corruption issues are not yet adequately integrated into business practices. The survey also shows that company size has a significant effect on performance. While nearly 50 percent of larger companies have institutional frameworks for industrial relations in place, only 25 percent of SMEs have such frameworks. This insight also points to the fact that SMEs need more support and guidance when it comes to addressing social and environmental issues in their specific contexts. The study also finds that publicly traded companies perform more strongly in some areas (such as anti-corruption), possibly owing to government regulation of their operations.
The Global Compact survey shows that an isolated, project-based view of corporate responsibility is gradually being replaced by an integrated understanding. It is clear that firms are looking for more than philanthropic projects managed by corporate headquarters. The survey reports that 79 percent of firms are trying to spread their corporate responsibility practices to subsidiaries in order to connect company-wide policies to local issues and problems.
The decision to be a leader of responsible enterprise is, of course, voluntary; however, companies always bear responsibility for the ways in which they treat their stakeholders and nature—and are judged on their impacts—whether or not they proactively or interactively assume the role of responsible business leadership. Further, the imperatives of ecological sustainability, which have become apparent in recent years, mean that few companies or individuals today can afford to ignore the systemic consequences of a production system that is not focused on both ecological sustainability and responsible practice. Responsible enterprise has become institutionalized in the sense that it is perceived by many as a broadly accepted part of doing business driven by pressures from consumers, civil society organizations, investors, governments, and of course the self-interest of corporations.
Given the preceding definition of responsible enterprise, we begin with a proposition: The core purpose of the corporation includes but goes far beyond generating shareholder wealth. Indeed, wealth and profits are simply important by-products of the firm's efforts to create a product or service for customers that adds enough value that customers are willing to pay for it. Value-added goods and services are produced through the efforts of employees, managers, suppliers, and allies, using a wide range of forms of capital. Management thinker Charles Handy puts the issue straightforwardly:
To turn shareholders' needs into a purpose is to be guilty of a logical confusion, to mistake a necessary condition for a sufficient one. We need to eat to live, food is a necessary condition of life. But if we lived mainly to eat, making food a sufficient or sole purpose of life, we would become gross. The purpose of a business, in other words, is not to make a profit, full stop. It is to make a profit so that the business can do something more or better. That "something" becomes the real justification for the business.
Further, capital investments in businesses go way beyond those made by shareholders. Capital does, of course, include the important financial resources supplied by owners and shareholders. Equally important, capital encompasses the intellectual and human capital provided by employees, the trust and loyalty of customers that products or services will meet expectations and add value (for which they will pay), and various forms of social capital. Further, capital includes the infrastructure and social relations supplied by the communities and other levels of government in locations where the company has facilities. Capital encompasses the natural resources supplied by the ecological environment that go into the production and delivery of goods and services. It includes interdependent relationships developed among its business partners, suppliers, and distributors, and it exists in the social contract written or understood by a range of local, state, and national governments, which provide the social—and legal—contract and necessary physical infrastructure on which the firm's existence is premised. All of these capitals are supplied to the firm by stakeholders. In this sense, we understand responsible enterprise as the task of developing and operationalizing positive stakeholder relationships.
We differentiate responsible enterprise from corporate citizenship. Some scholars have used the term corporate citizenship to describe the discretionary activities that firms are undertaking to be perceived as good citizens in their society. In this sense, corporate citizenship would be similar to the traditional understanding of corporate social responsibility as charitable giving and philanthropy. Other scholars have used the term corporate citizenship to describe the increasing political role of corporations. Here, citizenship implies that companies can in some cases act like governments and influence the rights of people (particularly when governments are not willing or able to do so). The latter understanding of corporate citizenship often analyzes similar issues as responsible enterprise, however from a different (i.e., rights-based) perspective.
(Continues...)
Excerpted from BUILDING THE RESPONSIBLE ENTERPRISE by SANDRA WADDOCK ANDREAS RASCHE Copyright © 2012 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Stanford University Press. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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