INTERNATIONAL BUSINESS

MANAGEMENT (BUSI 1346)

Corporate Social Responsibility

Lecture 22, 18 March 2009Dr Michael Wynn-Williams wm97@gre.ac.uk

1

THE ECONOMIC SYSTEM AND THE ENVIRONMENTAL EXTERNALITIES

Firms do not exist for themselves, they are part of human society

Does the earth have a finite carrying capacity?

Do current levels of economic activity exceed the carrying capacity?

How does the economic system respond to scarcities?

Is an externality a private good or a public good?

How should responsibility be allocated?

THE ISSUES AHEAD

Firms interact with the wider society and impact on the environment without necessarily taking full responsibility

Stakeholders are those that are impacted by a firm’s activities, but only a certain number receive compensation – employees, shareholders

Corporate Social Responsibility attempts to encourage firms to take responsibility for their impact

If firms are too selfish they may only bring short-term benefits – sustainability means taking the long-term overall effects into account

THE FIRM AS A SOCIETY MEMBER

TBL “fairness” targets People – employees and community Planet – sustainable environmental practices Profit – the economic benefit to the whole

community It is designed for public sector organisations,

but can also act as a guide for private companies

THE TRIPLE BOTTOM LINE

Source: Valley Green Building Task Force

David Crowther – the purpose of social accounting is to Measure and report on the impact a corporation has on its

environment Recognise the rights of stakeholders beyond the corporation

boundary

AccountAbility AA1000 offers a standard for including stakeholders in corporate strategy

Global Reporting Initiative (GRI) provides standardised sustainability reporting guidelines

United Nations Division for Sustainable Development Environmental Management Accounting (EMA) Guidelines for national governments looking to implement

their own principles (2001)

SOCIAL ACCOUNTING

A UN initiative to show that environmental, social and corporate governance (ESG) issues impact on investment decisions.

The principles provide a menu of voluntary options We will incorporate ESG issues into investment analysis and

decision-making processes. We will be active owners and incorporate ESG issues into our

ownership policies and practices. We will seek appropriate disclosure on ESG issues by the entities

in which we invest. We will promote acceptance and implementation of the Principles

within the investment industry. We will work together to enhance our effectiveness in

implementing the Principles. We will each report on our activities and progress towards

implementing the Principles.

The result should be enhanced financial rewards and align investment decisions with the aims of society at large.

PRINCIPLES FOR RESPONSIBLE INVESTMENT - PRI

International trade means that companies are increasingly in contact with unfamiliar labour laws

Companies have a choice between exploiting low local labour standards, or raising them to home standards

The International Labour Organisation (ILO) is the administrator for the International Labour Standards (ILS) A tripartite organisation – government, employers and employees Promotes opportunities for men and women to obtain decent and

productive work Promotes working conditions of freedom, equity, security and

dignity

ILO calls for a balance between flexible working practices and workers’ protection

Minimum wage agreements protect against deflationary wage spirals and social deprivation, but may inhibit job creation

Maintaining or raising working standards improves society in general and develops markets

PROTECTING THE EMPLOYEES

Developing nations are said to be at a disadvantage Lack of access to credit Lack of market power Dependence on perishable goods Inability to switch resources and factors of production

Farmers attempt to expand production to access economies of scale, but this leads to a cycle of falling prices and profits

The fair trade movement is made up of a number of organisations Fair Trade Labelling Organisations International (FLO) World Fair Trade Organisation (WFTO, formerly IFTA) Network of European Worldshops (NEWS) European Fair Trade Association (EFTA)

Their purpose is to Make direct connections between producers and buyers – no

middle-men Increase wages and profits to allow societies to invest in

themselves Set working conditions

FAIR TRADE

FINE

In theory, all trade entered into willingly must be fair Fair Trade organisations are themselves middlemen,

and require funds Fair Trade sets standards that can be difficult to

comply with, and even tougher when producers fail to comply

Adam Smith Institute criticises the market distortion Fair trade amounts to a subsidy When prices are low, subsidies discourage switching of resources Artificially raising prices with a price-floor means excess

production and even lower prices for non-fair trade producers According to defenders of fair trade

Prices start artificially low due to a lack of market power – the subsidy raises it to the rational market price

Fair trade does not affect the whole market, but may in fact segment the market with a new (premium) niche product

CRITICS OF FAIR TRADE

You are the overseas strategy director for Tesco, the supermarket chain

The company has recently expanded into Bangladesh You have offered the local workers an ethical

employment package Wages above the minimum wage Equal opportunities for men and women Training is available and there is opportunity for promotion

The employment contract is for hourly pay, meaning that there is job flexibility so that workers can arrange the job around their lives

However, Bangladesh is a country that is often beset by natural disasters, such as flooding. In such cases, many employees find it impossible to travel to work.

Your company policy, like in the UK, is that flexible employment terms mean that if people miss work they must make up the hours at another time or receive a reduction in their wages.

During a time of natural disaster, when it is impossible to work, this means that the difficulties are compounded by financial hardship. Is this fair?

CLASS TASK I – HOURLY WAGES

Not all efficient allocations are sustainable and not all sustainable allocations are efficient.

Market allocations may be either efficient or inefficient and either sustainable or unsustainable.

Policy changes that can produce win-win situations because by correcting an inefficiency, net benefits are increased.

CARE FOR THE ENVIRONMENT

A resource taxonomy is a classification system for resource availability.

Existing reserves Current reserves are resources that can be

extracted profitably at current prices. Potential reserves resources potentially

available. They depend on people’s willingness to pay and technology.

Resource endowment represents the natural occurrence of resources in the earth.

Taxonomy for Available Resources

Limited resourcesA depletable resource is not naturally

replenishedThe depletion rate is affected by demand,

which may change due to the price elasticity of demand

Allocation problems as the resource dwindles

A recyclable resource has some mass that can be recovered after use. Copper is an example of a depletable,

recyclable resourceRecycling may involve additional costs

A renewable resource is one that is naturally replenished. Examples are water, fish, forests and solar

energy.Requires flow management to prevent

structural damage

Taxonomy for Resource Limits

THE HYDROLOGIC CYCLE

Surface water is a renewable resource consisting of rivers, lakes and reservoirs.

Groundwater is water that collects underground in aquifers. Some aquifers are nonrenewable resources.

In many parts of the world, excess demand for water is causing great stress.

Groundwater levels have also been declining in many areas due to intensive pumping.

Water quality is also a growing problem.

Fundamental Resource: Water

Surface Water Opportunity cost of other uses Water is a highly variable resource

Ground Water Marginal user costs and benefits Depletable resource

Water Rights Riparian rights – land owner Prior appropriation doctrine – water

diverted to other uses Usufruct rights – right to use, not to

own

Water Allocation

Air is a public good Air is a mixture of elements at different

altitudes – air quality cannot be guaranteed However, air pollution has become a

significant externality Pollutants range from solids (particulates),

metals (eg. Lead), natural gases and industrial waste gases

Effects includeAcid rainRespiratory problemsClimate change

Filling the Air

Externalities can be paid for with caps and taxes Caps have predictable results, but unpredictable costs Taxes have predictable costs, but unpredictable results –

externalities are internalised so it is economically efficient but may not actually reduce emissions

The marginal abatement cost is different for different countries

In addition to caps, air can be commoditisd and CO2 can be traded Emission permits and credits are issued Surplus credits can be traded with organisations that

are in deficit Based on trading theory, there are gains from trade

available Developing nations can continue to build their heavy

industries by buying credits from developed nations – but this represents a tax on developing countries

Selling the Air

You are an activist with an environmental organisation

You have found that old oil wells can store CO2

How would you convince an oil company to spend money pumping CO2 into its empty oil wells?

How could this become a revenue generating activity for the firm?

Class Task

Elkington J (2001) Enter the Triple Bottom Line

<http://johnelkington.com/TBL-elkington-chapter.pdf> Principles for Responsible Investment

<http://www.unpri.org/>

Principles for Environmental Management Accounting <http://www.un.org/esa/sustdev/publications/proceduresandprinciples.pdf>

International Labour Organisation <http://www.ilo.org/global/lang--en/index.htm>

Nicholls A & Opal C – Fair Trade (Google Books) <http://books.google.co.uk/books?hl=en&lr=&id=Hmj6UlKhVDcC&oi=fnd&pg=PP10&dq=alex+nicholls+fair+trade&ots=5WbGN9Xkd1&sig=85eiXD_LeD3XfFsxZmp573_0j5A#v=onepage&q=&f=false>

Kit Kat chocolate goes Fair Trade – Telegraph article http://www.telegraph.co.uk/foodanddrink/foodanddrinknews/6730155/Nestles-Kit-Kat-goes-Fairtrade.html

Policy Options for Reducing Oil Consumption and Greenhouse-Gas Emissions from the U. S. Transportation Sector – Harvard University discussion paper <http://environment.harvard.edu/docs/faculty_pubs/lee_policy.pdf>

Useful Sources