Wednesday, November 06, 2013

What is the meaning of CSR for companies today?, talk at the launch of Abhati, University of St Gallen, Switzerland, 5 November 2013

Here is the text of my talk, titled "What is the meaning of CSR for companies today?", at the launch of Abhati, held at the University of St Gallen, Switzerland, yesterday, 5 November 2013:

My thanks to Anju and Divya for the kind invitation to speak at this auspicious launch of Abhati. And thanks to everyone in whose heart it has been to support it up to this point, without which Abhati could not have been born. So may I start by giving my very best wishes for the success and global impact of Abhati.

The topic that has been given to me for our event together is: “What is the meaning of Corporate Social Responsibility for companies today?”.

I guess, as I have been given 30 minutes for the talk, you want an answer detailed enough to fill something like 30 minutes but, as you know, the long message sometimes gets lost.

So let me give you the short message, the short answer to the question, right at the start so that you can’t forget it. Your take-away from this event, what I’d like you to think about, or rather what you need to think about, is this: The meaning of CSR impossible to understand except as a TREND.

Before the late 1960s, very few people talked about anything like CSR, and whatever happened in the field was driven by the beliefs, feelings and values of individuals.

For example, at the turn of the 19th century/ start of 20th century, there were people such as Carnegie and Ford in the US who, having made plenty of money, whether by right means or wrong, devoted part or all of the money they had made to social causes. The Carnegie Endowment and the Ford Foundation may be better known because of the power of the US media, but right here in Switzerland we had people such as Bircher, and the Raifeissen movement, and the founders of Migros and Coop, who made money by rather more ethical means (at least as far as I can see), and devoted part or whole of their profit to social purposes. In India, the country of origin for people such as myself and Anju and Divya and Satya and some others in our event today, we did not have this sort of thinking as part of our culture – whatever we gave, away from the family or the clan, was given only to gods and priests and monks.

But towards the end of nineteenth century, primarily because of the example and impact of Western missionaries who pioneered this sort of thinking in our country, our own thinking began to change when our leaders, such as Swami Vivekananda and, somewhat later, Mahatma Gandhi, accepted and started incorporating into our thinking the teachings of Jesus in this matter of social responsibility.

The most outstanding in our country, in India, were the Tata family – they belong to the Parsi community, and this community was the first to become thoroughly de-traditionalised because of the impact of the teachings of Jesus. However, Indian culture as a whole is still not sufficiently imbued by a sense of responsibility – as you noticed, I hope, by the facts and figures presented to you in the Abhati video at the start of our event, because of which we still have the problems to which Abhati is drawing our attention, and which Abhati is trying to address.

Now we mentioned people such as Carnegie and Ford in the West. They were the most startling exceptions because they did all they did publicly and, if you may allow me to put it that way, they did it loudly, but the mass of company owners and indeed ordinary individuals in the West did whatever they wanted to do in this matter of social responsibility quietly, because they followed Jesus’ instruction about not letting even your left hand know what your right hand does philanthropically. Just as, in His teaching, one is supposed to pray and fast without blowing a big trumpet about it, one is also supposed to do one’s philanthropy in secret. Social responsibility and philanthropy was part of the fabric of how you lived in the West – at least from the time of, or in those parts of the West, which were influenced by the Protestant or European Reformation.

With the decline of faith and allegiance to Jesus in the West (we can argue about when that decline started, and how far it has proceeded, and whether faith in Jesus is even reviving today), but in any case with the rise of corporations in the USA particularly since the 1950s, some aspect or the other of the necessity for corporations to abide publicly by some values has come to the fore, whether we call it corporate citizenship, corporate conscience, social performance, sustainable business, Triple Bottom Line business, or whatever.

Actually, aspects of CSR came more and more into prominence from the late 1960s when many multinational corporations started using the term “stakeholder” to describe those people who were NOT shareholders but on whom a company’s activities had a direct or indirect impact.

Ever since then, there has been an academic debate about whether or not companies make more long-term profit by operating with a CSR perspective: critics (most famously Milton Friedman) propounded the then somewhat strange idea that CSR distracts from the financial focus which, in their view business should have. Friedman, in a famous article put it this way: “The business of business is business” – or, as we may put it to make the idea more clear, “The business of business is nothing but business”. That is a right-wing view.

On the other hand, left-wing critics argued, and still argue, that CSR is merely window-dressing (the environmental part of which is dismissed by them as “greenwash”) because, in the left wing view, CSR attempts to pre-empt the role which government has, and should have, to keep a proper watch over corporations: unless there is proper legislation and regulation, a few companies will pretend to do the right thing, but the mass of companies will, under the cover provided by these few companies doing the right thing, the mass of companies will get away with as much as they can.

Both the right wing attempt to escape the notion of CSR, and the left wing attempt to condemn CSR, are increasingly discredited, especially since 2008, when Denmark became the first country in the world to adopt legislation requiring the 1100 largest Danish companies to include information, in their annual reports, not only on their CSR policies and practices but also on the RESULTS of those policies and practices AS WELL AS MANAGEMENT’S EXPECTATIONS OF THE FUTURE IMPACT OF THOSE POLICIES AND PRACTICES. Note that CSR itself is still entirely voluntary, according to this legislation – you may, if you wish, choose to do absolutely nothing! – but whatever you do or don’t do, you have to provide information to the public on how you position yourself with respect to social responsibility. In other words, you have to defend your decisions before the bar of public opinion. So guess what has happened! Yes, all these companies have in fact done a lot in the field of social responsibility.

That landmark legislation was followed by the UK, Australia and many other countries – so if is not so already - I expect that to become the initial global norm in this field. If you want to keep an eye on that whole area, keep a watch on the United Nations Global Compact.

Anyway, that Danish legislation remained the pioneering legislation in the field, as Australian, Brazilian, Canadian, Chinese, French, Irish, Japanese, South African, and Spanish legislation has followed, and increasingly even US and impending European legislation seem set to follow.

This year, however, India stepped ahead of that sort of legislation by introducing mandatory CSR spending of 1% of profit by all companies in India which have a net worth of Rupees 500 crore or more (that’s roughly USD 100 million) or turnover of Rupees 1000 crore (that’s roughly USD 200 million) or a net profit of Rupees 5 crore (that’s roughly USD 1 million).

Now the important matter is this: I have no doubt that India’s legislation will be followed by other countries, and that the amount required to be spent will also tend upwards: 1% is a sort of meaninglessly small quantity in boom times, though in crisis times (such as we have had around the globe since 2007), even 1% is probably considered onerous by many companies.

Today, except in the “sin industries” (tobacco, alcohol, weapons, casinos and gambling, prostitution and drugs) – except in such industries, CSR should really be considered an aspect of corporate governance, integrated into your business model by which you monitor and ensure your business's compliance with such laws, ethical standards and international norms.

CSR essentially takes ethical responsibility for a company’s actions so as to encourage a positive social and environmental impact – for example on communities, employees, consumers, stakeholders and all other members of the public. In other words, CSR goes beyond compliance, to furthering social good rather than short- or even medium-term profit maximisation.

There is now a recognised international standard for CSR: ISO 26000, and the United Nations has developed Principles for Responsible Investment as guidelines for organisations and individuals which have investments. So, if you now choose to do nothing about CSR and are asked about it in public, you have the choice of either appearing ignorant or appearing inhuman!

But, positively, what can CSR do for you if it is properly integrated into your company?

Well, it can help you in achieving and implementing your mission, by articulating the values for which your company stands and by which it intends to do business, and ensuring that those are in fact upheld in your investment decisions, your purchasing, your processing, everything that happens inside and in relation to the land and buildings you occupy, the way you treat employees and customers, your sales and marketing, the externalities your business creates (e.g. the impact on the environment) and so on. And that is what I want to turn to now: what approach can you take in practice towards implementing CSR in your company? I want to suggest that there are three elements that you need to think about.

First, of course, the absolute minimum that you can and must do is compliance with CSR laws such as I have mentioned. But it is only very short-sighted companies which will limit themselves to what the law is today. Once you understand that CSR is a global trend and that we are moving more and more in that direction, and if you keep in mind that it takes time in any company to embed any good practice or idea, any intelligent manager will try to keep ahead of the law by trying to understand how international norms and expectations of business are changing around the world. Now, even if you stick just to this first element - that is, compliance - you will find that it has considerable impact on your operations and even your strategy. For example, you will need to think about the environmental and social impact of each aspect of your current and future operations, and you will need to think especially of your company's view regarding what is encompassed by and constitutes operational risks. You will also think differently about how and in what areas you relate to investors, employees, sellers, customers, external communities and other stakeholders.

If the first element is compliance with existing law and emerging norms and expectations, the second element is corporate philanthropy. Now, you may choose to give away a little money or a lot of money in the form of donations, sponsorships and scholarships - whether you do that is up to you as a company – but you must, in today’s world, at least think of whether the skills that are in your company can be provided to help the disadvantaged in our world. For example, some companies expect every employee to donate a day a month, or a week a year, or a month every few years, to a registered charity of your employee’s choice: your employees donate their time, but the company pays their salary for that time. Other companies encourage those who are in their final few years of service before retirement to give an entire year. And the idea is not for your employee to go and work as an unskilled labourer, the idea is to provide the business skills of that employee to the NGO or non-governmental organisation in question, whether as an analyst, strategist, finance person, marketer or whatever. Now, it should be made clear that NGOs are not necessarily dumb organisations, they often have more clever and more highly skilled staff than companies – but the needs that NGOs are trying to cope with around the world are overwhelmingly huge, so any skilled assistance is highly needed and most welcome. In this context, there is one other matter to keep in mind: donating your employees’ time will not result only in helping the NGO, it will result also in your employees learning new things about management in a totally different kind of organisation (an NGO), and indeed they will learn new things about the world as a whole, which they will bring back to your own company. If you know how to, and can, utilise that new learning on the part of your employees, your company will itself reap a good harvest from your time-investment in corporate philanthropy.

Now, if the first element in any CSR orientation in your company is compliance, and the second is corporate philanthropy, what’s the third? It is the creation of what has come to be called “shared value”. While the second element, corporate philanthropy, may or may not necessarily or immediately have any visible strategic or operational impact, the third element, “shared value creation”, will certainly do so.

This requires creative and innovative thinking in relation to your company’s entire business model.

What is meant by “shared value”? Briefly, it is the creation of social value in such a way that it also benefits your business, or, the creation of business value in such a way that it also benefits society at the same time.

An example might be helpful, and I take Godrej, India’s best-known conglomerate in the field of white goods, high-tech engineering, and consumer products (Godrej is also, as it happens, Parsi-owned). Its concept of shared value is “policies and operating practices that enhance the competitiveness (of Godrej) while simultaneously advancing economic and social conditions in the communities in which it operates. Shared value creation focuses on identifying and expanding the connections between societal and economic progress. The concept rests on the premise that both economic and social progress must be addressed using value principles, with value defined as benefits relative to the costs, not just benefits alone. Godrej’s sustainability strategy, called “Good & Green”, is driven by the desire to identify shared value opportunities, which address social and environmental problems (e.g., low skill levels of work force, unmet basic needs of people at the bottom of the pyramid, climate change, high dependence on non-renewables, etc.) while at the same time strengthening Godrej’s drivers of competitiveness (e.g., innovating new products, improving talent pipeline, streamlining operations, etc.)".

As part of Good & Green, the Group aspires to create a more employable Indian workforce, a greener India, and innovate for good and green products, so that its goals for 2020 are:

• Giving one million rural and urban youth employment-related skills

• Achieving zero waste, carbon neutrality, positive water balance while reducing Godrej's specific energy consumption and increasing the proportion of renewable energy resources

• Ensuring that a third of Godrej's portfolio revenues consist of good and/or green products and services – defined as products that are environmentally superior or address a critical social issue (e.g., health, sanitation, disease prevention) for consumers at the bottom of the income pyramid.

You can see that Godrej is not being at all soft; it is bringing hard-nosed business thinking and applying it in a hugely and staggeringly ambitious way to itself for its own benefit as well as the benefit of the world.

While Godrej’s second and third goal, relating to zero waste and green products, could be taken up by any company even without any particular commitment to CSR, I want to draw your attention particularly to their first goal: giving to one million rural and urban young people skills that will make them employable.

You know that one of the reasons India lags behind in development is the availability of skilled labour. In fact, one of the reasons that Indian IT companies have been sourcing their employees from outside India, from Philippines to Eastern Europe and now even the US and Nicaragua, is that India simply does not produce enough skilled people. In fact, according to a recent report, assessment tests administered by the National Association of Software and Services Companies, the top trade grouping of such companies in India, found that 75% of technical graduates and more than 85% of general graduates are unemployable by India's high-growth global industries, including information technology and even simple call centres ( last accessed 5nov2013 0630 CET). I like to put it exaggeratedly in this way: our educational system is so intellectual that most of our engineers are unable even to change an electrical fuse around the house.

By contrast, if you think of Switzerland, where we are right now, probably the average Swiss is no more intelligent, though of course on average no less intelligent, than the average Indian, so how come Switzerland has been able to become one of the richest countries in the world? If you want anything like the full answer to that, you need to read Vishal Mangalawadi’s book, THE BOOK THAT MADE YOUR WORLD, but for the moment let’s put it like this: while Switzerland has only one or two educational institutions which make it to the top of the global rankings, such as ETH, and the University of Zurich, and the University of St Gallen, the AVERAGE level of education in Switzerland is, if not THE highest, certainly one of the highest in the world. Switzerland is one of the world’s leading countries in terms of innovation, of course not as high as Israel in terms of per capita innovation, but still one of the most innovative countries in the world, because of its high level of education for the average citizen.

Or let me put the point more strongly by means of the following illustration: even an uneducated and unskilled foreign immigrant, such as the lady who helps my wife with cleaning at home for a couple of hours a week, because the lady makes it a full-time job by helping different homes in the neighbourhood, is able to earn enough with her husband, who is rather better educated than her but doesn’t, for various reasons, actually make that much more than her - they are together able to have a very reasonable quality of life in what is one of the most expensive countries in the world, and are even able to take their family for a holiday abroad each year. The point is that Switzerland has been able to create system advantages, not merely advantages for a few individuals as in the case of India.

In order to create system advantages, countries need, for example, an apprentice system such as Switzerland has. And in the absence of a national system of apprenticeships, the Godrej goal of giving skills to a million Indians is not merely laudable, it is the best possible contribution to the nation, by which not only their own company will benefit (clearly, they will not be able to employ anything like a million skilled people, so other companies in the country will benefit too), but indeed the whole nation will benefit.

I hope the idea of “shared value creation” is at least a bit clearer.

So, as I am coming to the end of my time, let me summarise my talk: CSR is a trend that you cannot escape, even if you don’t believe in it. You are not paid to be a manager in order to ignore realities, but in order to negotiate realities - and, if you are to be an intelligent manager or indeed an intelligent businessman or businesswoman, you will negotiate the reality of CSR by being ahead of the game, by ensuring that your business is in compliance with legislation as well as with emerging global norms and expectations. Beyond that, you need to think about how much of your business portfolio is going to committed to corporate philanthropy (because you will certainly need to do at least a little of that) and you will need to think about how much you want to incorporate what elements of CSR and shared value in your business model.

Abhati has decided not only to be sustainable and responsible in its entire value chain from purchasing to production to employee welfare and sales and marketing, but even to give away 50% of its profits. You might want to do less than that, or more than that. King's Kurry, one of the companies of which I am a Director, is by its constitution mandated to give away 10% of its profit. Whatever you decide to do, the meaning of CSR for companies today is that you certainly can’t ignore the three elements that go into CSR: philanthropy, compliance, and shared value.

Thank you.

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