The credit crunch, rising inflation, the appreciation of the euro, housing bubbles bursting in Ireland and Spain – the business environment in Europe has become markedly tougher in the last 12 months. Does it still make sense for corporations to engage in corporate social responsibility (CSR) activity at a time when managers are concerned about rising commodity prices, the availability of finance and consumer confidence?
The issue is of course more complex than a simple yes or no. If corporate social responsibility activity is purely “altruistic or marketing led, it will rapidly disappear in times of recession but where CSR is pinned to business strategy and made a key part of business objectives a business case can be made for CSR that stands up in times of recession. The question then becomes how will CSR develop moving forward in this economic climate?
John Elkington, Founder of SustainAbility Ltd, has tracked and mapped the successive societal pressure waves that have shaped the political, government, business and financial agendas around CSR and sees CSR development in four waves.
The first stretches back to 1960, when the world (particularly the US and the West) began a long run up to the Wave 1 peak (1969-1973) with the first Earth Day in 1970. Then the whole cycle was slowed down considerably by the recession that followed the first Arab oil shock. This period saw new environmental protection agencies formed around the world, with business increasingly regulated and on the defensive, in compliance mode at best. The ensuing down wave saw a number of corporate and industrial controversies, e.g. Bhopal (1984) and Chernobyl (1986).
Wave 2 peaked 1988-91 and saw a much greater focus on consumer action, with companies trying to compete on a growing range of environmental or 'green' fronts. But eventually, this phase defaulted to corporate citizenship of various types. Companies spoke of moving "beyond compliance," but for most that wasn't too far beyond. Down wave 2 was marked by a number of corporate scandals (Shell in 1995, Nike, Monsanto), spotlighting the much more complex agenda then emerging. The triple bottom line framework, first launched in 1994, was an effort to capture that greater complexity. Also, companies were having to deal with issues buried way down their increasingly extended and complex supply chains. The ensuing down wave saw a growing focus on environmental and social management standards.
Wave 3 peaked between 1999 (with direct confrontations like the 'Battle of Seattle') and 2001 (with 9/11 and start of the 'War on Terrorism'). It focused on some of the downsides of globalisation and governance issues (both global and corporate). Enron-like scandals helped drive the latter, with pressure on IMF, WEF, World Bank and WTO driving the former. The need for better forms of global governance was increasingly clear, with people beginning to blend environment and security agendas, but 9/11 forced much more narrowly focused action.
Elkington believes that Wave 4, is now evolving energetically; once again building on the previous agendas, but quite distinct, “The focus this time around will be on disruptive innovation and scalable entrepreneurial solutions to some of the other big issues that have surfaced – for example climate change, poverty, access to medicines, corruption, water, etc”. This emergent agenda is dealt with in the book The Power of Unreasonable People .
However, there are counter-forces both economic as in previous down waves and new, including emerging (for example Chinese) companies not at all wedded to some of the CSR habits that western/northern companies have seen as increasingly crucial; plus the near-perfect storm of rising prices for energy and food, and the growing nervousness of major companies about the trends in available water, aggravated by climate change.
And other critical voices are still raised - CSR critic Milton Friedman argues that corporate social responsibility is a waste of shareholder resource that should rather be employed to generate returns on investment.
This distinction between investors and companies is important according to Seb Beloe of Henderson Global Investors. “Investors are incredibly short term and therefore tend to discount anything a few years out. Company management tend to have a longer-term perspective and are often more convinced of the value of CSR”. “For our company, it is an opportunity to participate more in society. And frankly this means you can participate more in the market, which means you have better business opportunities”, says David Kepler, Chief Sustainability Officer at Dow Chemical.
In terms of share performance some sustainable market indices like the Dow Jones Sustainability Index or FTSE4Good have not performed in line with the market. Beloe thinks that current market volatility has penalised smaller companies, which dominate for instance the FTSE4Good, more heavily. Whilst John Elkington points out that many of the companies that can afford CSR departments are precisely those likely to be hit by a consumer downturn or shaken by financial turmoil but is optimistic about the counter pressures that will sustain CSR.
Elkington believes that we are headed into a period very much like the early 1980s, where the recession will prove longer lasting and generally stickier than most of us currently are prepared to admit. “If I'm right, then I think we will see the CSR community experiencing the same sort of squeeze in the corporate sector that we saw in the early 1980s. Globalisation may slow that squeeze to a degree for international, high-brand companies, since so many of the drivers aren't regulatory, and even in the regulatory area we may see climate change and a new administration in the US starting to tighten up considerably.”
Globalisation has dramatically increased the number of stakeholders affected by business action. At the same time, advances in information technology allow global civil society to watch corporate supply chains in remote parts of the world and permit them to create groups of very vocal stakeholders around particular issues. This has led to a reputational minefield for firms operating globally. Societal and environmental pressures may be so well engrained by now consistently and steadily intensifying to ensure that CSR remains high on corporate agendas.
Given the flight to quality in economic downturns it is precisely a long-term CSR approach in companies that can help stabilise business and maintain loyalty when the benefits of corporate citizenship on company reputation help ensure customers turn to trusted brands.
So if the case for CSR in a downturn is made what approach should companies take? Given the wide array of issues enveloped within the CSR agenda, the sheer breadth of the possible reputational pitfalls has created a huge challenge. More than ever companies need to differentiate between those problems that are material to them and therefore require action and those that are not. Michael Porter and Mark Kramer in their December 2006 Harvard Business Review article argue that CSR has tended to entrain one issue after another to the point where it is hard to see what is genuinely material and therefore strategic for a given company. Elkington refers to this as a “snowball” and sees a need to help companies melt the snowball and sort out the entangled agendas using various forms of materiality assessment. Thaima Samman, Associate General Council at Microsoft, says that it is very important for firms “to identify where they can add value according to their specific activities, expertise and the needs of the people in the market where they are doing business.”
In Europe particularly, Chief Executives still see the environment as the most salient topic. When McKinsey surveyed CEOs last year on which issues will top the sociopolitical agenda over the next five years, 51% of them said that they expect environmental issues, including climate change, to gain most attention. This represents an increase of 20 percentage points over the previous survey in 2005. Data protection and job losses from offshoring came second and third in the list. In the same survey, European chief executives also felt that corporate political influence, pensions and product safety were the issues that could most strongly affect their shareholder value in the next five years.
To embed corporate social responsibility in the company culture, specific targets need to be set that drive changes of behaviour. Corporations should also lobby for a public policy environment that makes the business case for responsible business even stronger; and if CSR activities are in the corporate interest, their impact and efficiency need to be measured and evaluated alongside other business functions. But, perhaps most importantly, “management needs to communicate exactly how good performance on sustainability strengthens business success” explains Seb Beloe. No mean challenge for companies operating in a difficult business climate, but it seems that CSR central to business objectives, based on issues material to each individual company and responding to society’s needs, can be part of a successful business strategy during challenging economic times. One thing is clear CSR in whatever its next stage of evolution is here to stay.
By: N. Peter Kramer
