Corporate Social Responsibility: Wisdom or Window Dressing?

The scary economic developments of the past two years are contributing to a renaissance of discussion about “Corporate Social Responsibility,” and how it might have helped head off Wall Street’s precipitous failure. To explore that question, Truthout contributor William Fisher talked with Chip Pitts, one of the world’s leading authorities on the subject. In this interview, Professor Pitts answers key questions. He believes that CSR, if “properly implemented, would have prevented the crisis.” Former chief legal officer of Nokia Inc. and former chair of Amnesty International USA, Professor Pitts currently serves as president of the Bill of Rights Defense Committee and lectures on CSR and business/human rights at Stanford Law School and Oxford University. He is adviser to the UN Global Compact and the Business and Human Rights Resource Center and has also advised the successful Business Leaders Initiative for Human Rights, among other global CSR initiatives. He is co-author and editor of the first systematic legal treatise on the subject, “Corporate Social Responsibility: A Legal Analysis” (the royalties for which all go to sustainability and human rights charities).

William Fisher: What is CSR? Is it more than charitable giving through the company foundation?

Believe it or not, CSR does not stand for “Corporate Scandal Response,” but for “Corporate Social Responsibility.” And, suspicions to the contrary notwithstanding, neither CSR nor “business ethics” is the oxymoron it may seem to be at first glance. There was a false suggestion (reaching its high point in a 2001 European Union “Green Paper”) that CSR was merely voluntary and thus “optional,” but this is now widely and rightly seen as a misleading diversion orchestrated by corporate lobbyists. No corporation can be responsible without complying with law, so at a minimum, CSR of course begins with mandatory legal compliance: not just with local law, but (especially in developing countries where local law may be absent or unenforced) global human rights and environmental laws. But beyond that, CSR requires compliance with the highest global ethical standards, meaning that corporations must not only “do no harm,” but also “do what good they can.” This does not mean mere philanthropy – charitable giving of some small percent of profits back to the community – although a philanthropic impulse and philanthropy remains a (relatively minor) part of CSR.

CSR is responding to major structural drivers and expectations of investors, employees, NGOs, global media, governments and society at large – stakeholders who will reward companies that “get it right” and punish those who get it wrong. As a result, CSR requires accountable and long-term sustainability: deeply integrated decision making that manages risk, seizes brand and employee recruitment and retention benefits and drives the “triple bottom line” (people and the planet as well as profits) throughout the core business, so that corporations are not part of the problems experienced today (social and environmental externalities like climate change, pollution, human rights abuse, conflict and war), but instead are aligned with society and the expectations of all stakeholders to contribute to much-needed solutions.

“Sustainability doesn’t refer merely to profit-making sustainability, although some business executives have unfortunately started to use it perversely in that narrow sense, and doesn’t refer merely to environmental sustainability, but includes long-term, future-oriented social sustainability as well – of the systems that support all of us. An exciting CSR trend is thus corporate deployment of their core competencies – strategic thinking, marketing, logistics, inventory control, etc. – in innovative public-private partnerships aimed at fighting HIV/AIDs, preserving scarce water resources, combating poverty and achieving other public goods. This “business case” for CSR is why it has held up so well during the financial and economic crisis of the last several years, as assessed by various independent sources. And this integration of CSR into the core business, and not unlimited campaign spending by fictional corporate persons granted “free speech rights” under the recent US Supreme Court’s “Citizens United” decision, is the true meaning of corporate citizenship (which, properly understood and implemented, should be synonymous with CSR).

Fisher: Who uses CSR?

Professor Pitts: CSR is relevant to businesses of all sorts and sizes, although global corporations subject to tremendous stakeholder scrutiny and pressure (by NGOs such as Greenpeace and Amnesty International, governments, the global media, international organizations and unions) have taken it up to a greater extent either as a result of various scandals or in order to achieve the various business benefits and proactively maintain their “social license to operate.” Small and medium enterprises (SMEs), though, have a tremendous economic impact and form part of the supply chains of the larger global corporations – tens of thousands in Wal-Mart’s supply chain alone – and so can and must also implement CSR within their own spheres of influence. People are also trying to enhance attention to core CSR concepts even within the informal or black-market sector (again, as ironic as that may seem), given its persistent importance, especially in developing countries. Governments and international development and aid agencies are looking to forms of CSR in which companies join multi-stakeholder initiatives to help solve some of the world’s most significant problems. (This is the impetus behind the UN Global Compact, for example, or the International Labor Organization’s Better Work initiative). More broadly, CSR includes the increasingly convergent global norms of human rights and sustainable development – such as the human rights, environmental and anti-corruption principles of the UN Global Compact – that form the framework for our continued peaceful existence on the planet, so it is incumbent on all of us to support greater CSR, whether as employees of corporations, or consumers needing to make more ethical (e.g. fair trade) purchasing decisions. So if the question is “who uses it,” the answer should be: YOU – and all of us!

Fisher: Do any companies have long histories and demonstrable achievements from their use of CSR?

Pitts: The roots of CSR are deep in societies around the world, drawing on longstanding universal ethical norms such as the Golden Rule, and common sense notions of preserving the natural and other resources that sustain all of us (as well as the companies). Moreover, notions of CSR were “present at the inception” of the corporation. From the very inception of bodies corporate, such as the Roman societates, through medieval bodies corporate (universities, cities, guilds), and even chartered companies of the age of exploration, and the colonial companies and corporate churches, utilities and charitable entities involved at the founding of the United States of America, corporations have generally had public as well as private purposes (although companies like the British and Dutch East Indies companies also caused great harm). Modern corporations, too, which achieved key attributes of their current form (such as limited liability) in the 19th century, were often conceived with social purposes as well as private profit in mind. Thus, companies in England such as Unilever (founded by Lord Leverhulme) and Cadbury chocolate company (conceived of by George Cadbury as having humanitarian purposes) have long-standing CSR traditions and demonstrable achievements that continue today – consider Unilever Hindustan’s Shakti program empowering female entrepreneurs – although these companies, like other companies, also have had CSR problems including serious issues pertaining to the labor conditions under which their products are manufactured. In India, Tata similarly has a long tradition of investing in communities as well as occasional scandals, and in the United States the same could be said of companies such as Sears, whose founder Julius Rosenwald helped create 4-H programs and train farmers in agricultural techniques, and J.C. Penney, whose founding executives famously embraced positive values in ways that have been emulated by many companies today, including Hewlett-Packard and Nokia. Ford is another example: it is prominent in environmental efforts today and was the birthplace of the doctrine of Fordism, whereby workers get paid enough to buy the products they make … but the company also has a dark history of complicity with forced labor in Nazi Germany and apartheid in South Africa, as well as with violent repression of unionists and political dissenters in Latin America. So even leading companies like Ford often have mixed records, at best, of compliance with CSR principles.

Fisher: How about companies in the financial services sector? Any users here?

Pitts: The financial sector is actually a place of great CSR activity in recent years, as initiatives like the United Nations Principles for Responsible Investment and the Equator Principles now cover trillions of dollars in investment money committed to take environmental and social factors into account in investment activities. The Equator Principles now cover the vast majority of project finance in the world, in yet another demonstration of how the most sophisticated investors now understand that so-called “non-financial” risks (relating to the environment or human rights) can have a tremendous impact in terms of the financial bottom line and so must be the subject of enhanced monitoring and reporting.

Fisher: Could CSR have impacted the behavior of the “too big to fail” institutions that brought us to the brink of financial disaster?

Pitts: Properly implemented, CSR indeed would have prevented the crisis, which at core was about the opposite of each of the seven principles in my most recent CSR book. Instead of integrated decision-making that recognizes longer-term duties to the system – to society and the planet as well as for short-term profit – we saw utter neglect of those duties. Instead of adequate attention to all stakeholders, we saw myopic and greedy focus on returns only to top executives, managers and shareholders. Instead of transparency, we saw manipulation of corporate forms and opaque financial instruments such as derivatives and credit default swaps. Instead of consistent best practices and compliance with the highest global legal and ethical standards, we again saw evasive manipulation of loopholes. Instead of precautionary risk management, we saw systemic moral hazard. Instead of accountability, we saw offloading risk and responsibility onto a stream of other actors. And instead of attention to and investment in the community, we saw rapacious inattention to and plundering of communities. The ultimate cause of the crisis was the ideological embrace of Milton Friedman’s warped but still dominant view that “the only social responsibility of business is to make a profit for its shareholders,” and until that socially and economically counterproductive – and empirically, legally and ethically inaccurate – view is corrected, we will continue to have the increasing and more intense crises of global capitalism that we have seen recur with ever greater frequency over the past forty years. Sadly but clearly, the lessons have still not been learned. The crisis was not just a crisis of the financial sector, but one arising from an ill-informed and erroneous mindset that still infects businesses in general and requires correction.

Is CSR a top-down or a bottom-up practice?

Pitts: CSR is both top-down and bottom-up. Premised on engagement with all stakeholders instead of only shareholders, CSR requires broad dialogue with workers, community members and other elements of society in order to align the company with society. It also requires transparency so that investors, communities and other stakeholders can hold companies accountable. But without commitment and “tone at the top” – with the CEO, board members and top managers leading by example – CSR will not succeed.

Fisher: How is CSR organized?

Pitts: CSR starts with a commitment to “integrated decision-making” i.e. systemic thinking that sees the interrelationships between top global issues, stakeholders, corporate departments and previously segregated roles of individuals (e.g. applying different principles in their corporate life than they do in their personal or spiritual lives). By obliterating prior boundaries that blocked alignment with society, CSR can expand corporate vision, transform the corporate mission, inform strategy and motivate employees and all stakeholders to take the enterprise to the next level in ways that sustain resources for present and future generations. Stakeholder engagement is a key procedural plank for CSR, with greater transparency within the corporation and outwards toward society driving progress, enhanced risk management and accountability for results.

Fisher: How is CSR managed?

Pitts: Sometimes companies segregate the CSR or Sustainability or Corporate Citizenship function in a separate department and expect that department to handle CSR issues in isolation – a recipe for CSR failure and enhanced rather than reduced risk. Other companies still consider CSR mainly a “public relations” exercise and relegate it to the PR or Communications function – also a red flag that the company may not truly understand CSR. Indeed, while reaping brand benefits is a major driver for CSR, and critics are wrong to say that CSR is “merely” PR, overemphasizing PR above substance remains one of the common traps to be avoided by companies attempting to implement CSR. Real CSR has resulted in tangible benefits in terms of enhanced attention to human rights by extractive industries and reduced instances of child and forced labor in supply chains, but those achievements take hard work and not glossy brochures. Because of the broad purview and authority of the legal function in many leading global businesses, and the fact that CSR begins with legal compliance, the Legal Department is often the focal point for CSR in many companies, working to ensure an integrated CSR approach. At other times, there is a dedicated CSR function with a senior VP in charge who works closely with legal and other business functions. But whether tied to Legal, or Public Affairs, or another function, and even if there are senior executives and dedicated CSR staff, the best companies realize that to be successful CSR must truly be integrated into the company’s vision, mission, strategy and core business. Otherwise you may have the CSR or PR department saying one thing, for example, while procurement does the opposite or a business unit leader creates pressures for human rights violations or environmental degradation in the supply chain by establishing targets at odds with responsible action. Performance incentives must be aligned with CSR commitments and metrics, so that executives and employees alike are evaluated in part on CSR targets and values as well as more traditional revenue and profit targets, reaping rewards for successful achievements and risking penalties up to and including termination for violation of CSR and ethical commitments. A variety of new management tools ranging from online guides to human rights impact assessments (complementing the more traditional environmental risk assessments) now exist to help manage CSR in a responsible fashion and ensure it is not treated as a mere “add on.” Environmental tools have been around quite awhile, but for the last several years there has also been a new UN Framework for Business and Human Rights that emphasizes the corporate responsibility to respect all human rights, starting with having an explicit policy to that effect but backed up with a variety of “due diligence” procedures ensuring integration, risk management, evaluation, and existence of effective remedies and grievance procedures. The UN Framework as well as many new tools to assist are catalogued by the London-based Business and Human Rights Resource Center (www.business-humanrights.org). These range from the Guide for Integrating Human Rights Into Business Management created by the Business Leaders Initiative for Human Rights in conjunction with the UN Global Compact and the Office of the High Commissioner for Human Rights, to various other management approaches to CSR issues, most of which revolve around traditional notions of planning, taking action, and checking on results as a feedback loop into renewed planning and action.

Fisher: How is CSR evaluated?

Pitts: CSR is evaluated both via internal audit and review mechanisms and a variety of external review, audit and verification mechanisms, some of which are within the ambit of company influence and some of which are less subject to company control. As an example of internal mechanisms, one leading company, General Electric, has a world-class internal audit team which goes far beyond the “green eyeshades” implication that the word “audit” suggests; the audit function there has historically served as a source for future corporate leaders as well as a critical check to ensure compliance with the spirit as well as the letter of the corporate code of conduct. GE also embeds CSR into its rigorous operational reviews. But in addition to such internal mechanisms, GE also participates in sustainability stock indexes such as the Dow Jones Sustainability Index, and is subject to other external review by various stakeholders. Of course, companies that do not adhere to CSR are also now subject to various sorts of market and legal pressures, ranging from protests and boycotts, to adverse media coverage, to enforcement actions by government agencies and litigation.

Fisher: What are the roles of chair, board, CEO, CFO, shareholders, employees, etc. in making CSR a company-wide practice?

Pitts: The balance to be struck here is between an unmistakably honest and strong commitment and accountability “from the top” – the CEO and board and other “C-suite” executives – and the distributed leadership necessary for CSR to truly permeate the enterprise. While the CEO is and should be ultimately accountable, and it usually makes sense to have rigorous supporting mechanisms such as a top executive specifically charged and focused on CSR issues, as well as a board-level committee dealing with matters of CSR, business ethics, and risk management, this should not be an excuse for avoiding similarly accountable leadership by other core business functions including the heads of business units and country leaders and the heads of critical functions such as manufacturing, procurement, logistics, quality control, legal, human resources, finance and the like. Indeed, within their own “spheres of influence and activity” each employee and each participant in the enterprise’s extended value chain should know and be accountable for their CSR obligations. One fascinating development in recent years is how large companies like Wal-Mart or the major apparel brands are dramatically influencing behavior throughout their supply chains by requiring CSR compliance as a condition of being a supplier.

Fisher: How do you make CSR part of the corporate culture?

Pitts: As with the question of human rights and environmental compliance in society at large, this is in fact the most critical question. The law and market incentives are inherently limited – they can only go so far without risking counterproductive legal, practical or market failures. So even though (as discussed above) CSR involves compliance with law and is also “enforced” through both positive and negative incentives, both practical experience and academic research indicate that it can all be fruitless unless the culture and values of the company support CSR and accountable results. To hear some business leaders or business school academics discuss the subject, you may come away with the impression that virtually any values are acceptable and that a “values-based” company is simply one that has values – even if those values merely relate to short-term shareholder and management wealth maximization. This is wrong. Genuine leadership is inherently moral. So the values chosen matter tremendously, and they must be values aligned with society (including the most universal statement of human values in history, the Universal Declaration of Human Rights, as well as clear values of sustainability evidenced in global declarations like the Stockholm and Rio Declarations. Objective analysis of the corporate values and culture – both stated/explicit and tacit/actual – is thus crucial, and can be accomplished by a variety of techniques including employee and stakeholder surveys and interviews. My Stanford Law School students are working with the UN Global Compact to survey corporate values and consider means of promoting the uptake of appropriate world-class CSR values (which takes on even greater importance as China and the other “BRIC” countries come online). Already, it is clear that one thing you don’t want to do is simply consider CSR to be a narrow “check the box” compliance function, which is calculated to miss issues, create rather than appropriately manage risks, and undermine the authentic CSR culture that derives from the right values implemented in the right fashion. Instead, the best companies are increasingly having recourse to innovative techniques based on the latest scientific understandings of human nature and learning, including scenario planning and proactive brainstorming, experiential methods, multimedia, literature/stories and even theater, all of which can be excellent ways to enhance employee abilities to truly listen to, understand and respond to stakeholder perceptions, and even create new products, services, business models and entirely new market opportunities as a result.