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CSR & Development: an introduction to issues & institutions

• Context, concepts, key issues

• Emerging institutions in CSR

• Implications for firms

• Implications for development

Dr. Anthony MillerUnited Nations Conference on Trade and Developmentanthony.miller@unctad.org

Main Concepts of CSR

Social Contract (Donaldson, 1982; Donaldson and Dunfee, 1999) – There is a tacit social contract between the firm and society; the contract bestows certain rights in exchange for certain responsibilities.

Stakeholder Theory (Freeman, 1984) – A stakeholder is “any group or individual who can affect or is affected by the achievement of an organisation’s purpose.” Argues that it is in the company’s strategic interest to respect the interests of all its stakeholders.

CSR (Carrol, 1979) Firms have responsibilities to societies including economic, legal,

ethical and discretionary (or philanthropic).- See also DeGeorge (1999) on the “Myth of the Amoral Firm”

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Main Concepts of CSR

Milton Friedman

“…the doctrine of ‘social responsibility’ involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses.”

“…there is only one social responsibility for companies and that is to make as much money as possible…

…while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.”

Main Concepts of CSR

“…[CSR] is liable to hold back the development of poor countries through the suppression of employment opportunities within them.”

David Henderson

“[CSR]’s adoption would reduce competition and economic freedom, and undermine the market economy.”

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Main Concepts of CSR

CSR = political economy

The rights and responsibilities assigned to private

industry.

Context: Globalisation & the Imbedded Firm

• Liberalisation of markets – reduction of the regulatory approach

• Emergence of global giants, consolidation of market share

• Development of the ‘embedded firm’ and the global value chain– Development of supplier networks in developing

countries

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Key Issues in CSR• Labour rights:

– child labour – forced labour – right to organise – safety and health

• Environmental conditions– water & air emissions– climate change

• Human rights– cooperation with paramilitary forces– complicity in extra-judicial killings

• Poverty Alleviation– unemployment– public revenues– skills and technology

Emerging Institutions in CSR

• NGO Activism

• SRI

• Litigation

• UN initiatives

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NGO Activism

• The ‘Seattle Effect’

• Boycotts, brand damage, influence legislation, domino effect

• e.g. Shell in Nigeria, Exxon in Cameroon, Apparel Industry (Nike, Gap), GMO, Wood Products, etc.

• Facilitators: IT (espInternet), media, low cost travel

Domino Effect in the US Wood Products Industry: 7 out of top 10 shift policy on old growth within 18 months

5Payless CashwaysDec - 2000

484 LumberAug - 2000

2LowesAug - 2000

3MenardsJan - 2000

9WickesNov - 1999

6Home BaseNov - 1999

1Home DepotAug - 1999

Industry RankCompanyDate of Policy Shift

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Socially Responsible Investing (SRI)• Roots of: South Africa Apartheid

Divestment

• Significant size: US SRI = 2.3 trillion $ in 2005 or 10% of all professionally managed investments

• Shareholder activism: shareholder resolutions; voting process

• Influence corporate reporting and disclosure requirements

• New rules on CSR reporting in the UK, France, Australia

Shareholder Activism at Exxon Mobile

0

1

2

3

4

5

6

7

2000 2001 2002 2003

No.

Res

olut

ions

File

d

0%

5%

10%

15%

20%

25%

Avg.

Vot

e in

Sup

port

CG CSR & X-over Vote CG Vote CSR & X-over

From 2000 to 2003, over 70% of shareholder resolutions filed at XOM were related to social & environmental issues.

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Signatories will1 …incorporate ESG issues into investment analysis and

decision-making processes.2 …be active owners and incorporate ESG issues into our

ownership policies and practices.3 …seek appropriate disclosure on ESG issues by the entities in

which we invest.4 …promote acceptance and implementation of the Principles

within the investment industry.5 …work together to enhance our effectiveness in implementing

the Principles.6 …each report on our activities and progress towards

implementing the Principles.

Principles for Responsible Investmentwww.unpri.org

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22%

25%

31%

34%

44%

47%

50%

50%

56%

69%

44%

31%

28%

31%

22%

28%

22%

25%

16%

6%

34%

44%

41%

34%

34%

25%

28%

25%

28%

25%

Climate Change

Health Issues

Human Rights

Environmental Management

Employee Relations

BEE and Gender Empowerment Issues

HIV/Aids

Infrastructure Development

Sustainability

Corporate Governance

Very Important Somewhat Important Not Important

Please indicate the extent to which you feel the following ESG issues are important in evaluating the likely performance of investments:

The Materiality of ESG Issues – Survey of Pension Funds (PRI)

70% 30%

18.5%

81.5%

0 10 20 30 40 50 60 70 80 90 100

No

Yes

Asset owners. Do you expect to implement ESG policies in your emerging market investments within the next 3 years?

Investor opinion survey (IFC)

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• Foreign Direct Liability

• Alien Tort Claims Act (ATCA): human rights, environmental rights� Unocal Burma

� Coca-Cola Columbia

� Rio Tinto Papau New Guinea

� Del Monte Guatemala

� The Gap Saipan

� Shell Nigeria

• Other tools: RICO, False Advertising – E.g. Saipan ‘sweatshop’ cases; Katsky v. Nike

Litigation

$30,000,000 settlement

United Nations Initiatives• UN Global Compact• UN Principles for Responsible Investment• UNEP Equator Principles• ILO Tripartite Declaration of Principles

concerning Multinational Enterprises and Social Policy (MNE Declaration)

• UNHCHR Business and Human Rights• UNODC Anti-corruption• UNCTAD Corporate Responsibility

Reporting, World Investment Report

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Emerging Governance Institutions:a mutually reinforcing set of institutions

Litigation

SRINational Govt& UN

NGO

TNC as an “organ of society”

“every individual and every organ of society [should] promote respect for these rights and freedoms and to secure their universal and effective recognition.” - UN International Declaration of Human Rights

International principles apply only to governments

International principles apply to governments andcompanies

It would be a strange tort system that imposed liability on state actors but not on those who conspired with them to perpetrate illegal acts through coercive use of state power. - 1997 Eastman Kodack Co. v. Kalvin

Trend in international law

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Sphere of Influence

Who – is to be influenced?

Sphere of Influence

What – issues are to be influenced?

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Sphere of Influence

How – are those issues to be influenced?

Sphere of InfluenceExample: Mattel

Who: suppliers, JVs and branch plants

What: OSH

How: focus on manufacturing processes, HR, factory design

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Corporate Compliance Management: Governing the Global Value Chain

How do companies govern socio-environmental & legal compliance issues within their value chain?

• Code of Conduct

• Compliance Management

• Accounting and Reporting

Code of Conduct:Widespread adoption among TNCs

Adoption of…• More than half of the 100 largest firms by global revenue (Fortune Global 100)

• More than a third of the 100 largest firms by foreign assets (UNCTAD WIR 100)

• 57% of all foreign assets

• 51% of all foreign sales

• 65% of all foreign employees

Multi-Sector7% Technology

17%

Services20%Light Industry

17%

Heavy Industry 27%

Not Specified12%

Codes found among all industrial sectors.

Source: OECD 1999 survey of 233 codes

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Code of Conduct:Issue emphasis varies by industry

0 20 40 60 80 100

Multi-Sector

Technology

Services

LightIndustry

HeavyIndustry

% of Codes addressing issue

Environment

Fair Employment &Labour RightsRule of Law

Fair Business Practices

Source: OECD 1999 survey of 233 codes

Code of Conduct:Emerging consensus on key issues

Source: Conference Board 1999, Survey of 123 Codes

0% 25% 50% 75% 100%

Human rights

Confidentiality of personal information

Community relations

Political activities

Workplace safety

Antitrust

Sexual harassment

Environment

Giving gifts

Discrimination / equal opportunity

Receiving gifts

Security of proprietary information

Conflict of interest

Bribery/improper payments

% of codes addressing issue

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Code of Conduct:Cascade effect

82%

50%

34%

22%

0%

25%

50%

75%

100%

Company Contractors Sub-contractors

Customers

as %

of a

ll co

des

surv

eyed

Source: OECD 1999 survey of 233 codes

Code of Conduct:Cascade effect

Source: Conference Board 1999, Survey of 123 Codes

0% 10% 20% 30% 40% 50%

Nepotism

Child labor

Whistleblowing

Political activities

Human rights

Workplace safety

Sexual harassment

Discrimination / equal opportunity

Environment

Conflict of interest

Bribery/improper payments

Receiving gifts

Giving gifts

% of COE applying to JV partner or Supplier/Vendor

JV Partners Suppliers/ Vendors

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Compliance Management:Systems approach

Sustainable business development does not come about of its own accord. Rather, commitment to sustainability demands that corporate processes be reliably controlled and that everyone's actions -in finance as much as in environmental and social areas - be coordinated. Prerequisites for this are binding guidelines, unambiguous corporate goals and a clear organizational structure.

- Deutsche Telekom

Compliance Management:Management structure

Example: Chiquita

Board of Directors

President & CEO

Group Presidents

Chief Financial Officer

VP of Human Resources

General Counsel

Corporate Responsibility

Officer

Steering Committee

Audit Committee of Board

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Compliance Management:Plan, Do, Check, Act method

Plan• Consult stakeholders

• Establish code of conduct

• Set targets

Do• Establish management systems and personnel

• Promote code compliance

Check• Measure progress

• Audit

• Report

Act• Corrective action

• Reform of systems

Compliance Management:Governing the value chain

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Compliance Management:Management by certification

QS 9000 by Region

USA

Asia

Europe

S. America

Australia & S. Pacific

Sub-Saharan Africa

Middle East & N.

Africa

NAFTA (excl. USA)

• Introduced 1994

• By 2002: 24,000 factories, 70 countries

Compliance Management:Management by certification

ISO 14000 by Region

Europe

Far East

N. America

Aust./ New Zealand

S. America

Africa/ W. Asia

• Introduced 1998

• By 2005: 763 factories, 47 countries

• Introduced 1995

• By 2002: 37,000 factories, 112 countries

SA 8000 by Region

Asia

Europe

N. America

S. AmericaAfrica

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Compliance Management:Management by certification

ISO 26000: Social Responsibility• To be Introduced in 2009 or 2010

• NOT a Management System (?)

• NOT a Certifiable Standard (?)

Principles of SR1. Ethical behaviour 2. Respect for rule of law 3. Respect for international norms of behaviour

4. Respect for and considering of stakeholder interests5. Accountability 6. Transparency

7. Precautionary approach 8. Respect for human rights

Organizational Governance

Hum

an R

ight

s

Labo

ur P

ract

ises

Envi

ronm

ent

Fair

ope

ratin

g pr

actis

es

Con

sum

er is

sues

Soci

al &

Eco

nom

ic

Dev

elop

men

t

Core Subjects Implementing SR

7.2 Defining scope

7.5Implementing in daily practise

7.7Evaluating performance

7.8Enhancing credibility

7.4 Integrating into organization

ISO 26000 Roadmap

7.3 Working With Stakeholders

7.3 Communicating

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Compliance Management:Supply chain specific

Accounting and Reporting:CR reporting becomes ‘mainstream’

% of Large Firms Issuing a CSR Report

64%

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Accounting and Reporting:Growth of report verification

% of CSR Reports with External Assurance Statement

30%

33%

Accounting and Reporting:Emerging standards

Global Reporting Initiative (GRI)A multi-stakeholder initiativewww.globalreporting.org

International Standards of Accounting and Reporting (ISAR)A project of UNCTADwww.unctad.org/isar

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Implications for Development

• CSR ‘cascade effect’ on members of the global value chain– labour conditions (e.g. OSH, right to

organise, wages)– environmental controls– transfer of new management

techniques

• Compensation for weak legal environment in LDCs

• Impact on economic development & national competitiveness???

Implications for Development:Experiments in quantification

R2 = 0.6079

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

30 35 40 45 50 55 60 65 70 75 80

National Corporate Responsibility Index (2003 Score)

Labo

r Cos

t per

wor

ker i

n m

anuf

actu

ring

($ p

er y

ear,

1990

-199

4)

Indonesia Costa Rica

Does an increase in CSR correspond with an increase in labour costs?

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Implications for Development:Experiments in quantification

Does an increase in CSR correspond with a decrease in real GDP growth?

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

30 35 40 45 50 55 60 65 70 75 80

National Corporate Responsibility Index (2003 Score)

Rea

l GD

P G

row

th A

vger

age

1991

-200

1

China

Turkey

New Zealand

Thailand

Russia

Ireland

Indonesia

Principles for Responsible Management Education