CSR is good for business if taken as a strategic approach to running a company or institution. Thus CSR goes further, much further, than a purely philanthropic handout.
Corporate Social Responsibility is concerned with treating the key stakeholders of a company or institution ethically or in a responsible manner. ‘Ethically or responsible’ means treating key stakeholders in a manner deemed acceptable according to international norms. Social includes economic and environmental responsibility. Stake-holders exist both within a firm and outside.
CSR has begun to make an impact in Pakistan as can be seen by recent publications such as the beautifully produced 2009 publication ‘CSR Pakistan: Evolution, Rise and Impact on Socio Economic Development’ by Yawar Mian of Capital Business1.
Strategic CSR, that is, a systems approach to doing well by doing good has barely been used, to date, in Pakistan. Alert readers will also notice that my above definition extends the notion of ‘corporate’ to anybody, that is, any group of people working together in a common effort. Consequently, the tools and methodology of CSR can be applied, almost without change, to public institutions, NGOs, social enterprises and even more abstract concepts such as resolving conflict situations through CSR.
Readers may well wonder what CSR has to contribute after we have seen a heady mix of greed, overconfidence and the use of poor business models that led to the global financial collapse of the past two years. Banks and other financial institutions are once again in the news for paying huge bonuses on the backs of taxpayers’ bail outs. And one can wonder whether the merry go round of greed, overconfidence and flawed strategies is about to spin again thereby continuing the notion that major financial institutions act irresponsibly and not in the public interest.
Strategic CSR and Competitive Advantage
After this ambitious start you may be wondering how my above assertions on CSR can help? In fact, as we define CSR today, CSR is a strategic systems approach that examines and influences the behaviour of a company while preserving its competitive advantage. Let me deconstruct that sentence.
- CSR means treating the main stakeholders of a company in a responsible manner;
- Corporate means any group of people that work together in a company or organization, whether for profit or non-profit;
- Social means the social system and includes finance, economy, environment and social issues;
- Responsibility is about taking issues that affect the corporate body seriously and about acting within – and even beyond – societal norms;
- Strategic means having a strategy that takes an idea into a working model;
- A systems approach means including all aspects of the system in the decision making process;
- Competitive advantage is the implementation of a value-creating strategy not simultaneously being implemented by any current or potential competitors.
Strategic CSR – A Bit of History
Take Michael Porter and Mark Kramer’s (P-K) influential Harvard Business Review Article of December 2006. There they argued that ‘while CSR depends on being a good corporate citizen and addressing every social harm the business creates, strategic CSR is far more selective’. The interdependence between business and society takes two forms in P-K’s framework: “inside-out linkages” where company operations impact society, and “outside-in linkages” where external societal forces impact companies. They believe that although companies are called on to address hundreds of social issues, ‘only a few represent opportunities to make a real difference to society or to confer a competitive advantage’. I would rather use the word ‘and’ rather than ‘or’ but readers may feel I am splitting hairs at this point. P-K give three areas where they think competitive advantage may lie in strategic CSR:
First, identify points of intersection between your company and society. For instance, does the company provide safe working conditions and reasonable wages? Models for this can be found in the work of SA8000 or the Fair Labour Association (FLA).
Second, select specific social issues to address social needs in ways that create shared value – a meaningful benefit for society that also adds to your company’s bottom line. For instance, in addressing the AIDS pandemic in Africa, a mining company such as Anglo American would not only improve the standard of living on that continent; it would also improve the productivity of the African labour force on which its success depends.
Third, mount a small number of initiatives that generate large and distinctive benefits for society and your company. Example: The Ecomagination initiative General Electric launched in early 2005 benefits society through environmentally beneficial products (such as compact fluorescent light bulbs) while benefiting the company’s bottom line. The initiative boosted revenue on such products from $6.2 billion in 2004, before the initiative began, to $10.1 billion in 2005, over halfway to the goal of $20 billion by 2010.
Strategic CSR transforms “value chain social impacts” into activities that benefit society while simultaneously reinforcing corporate strategy and also advancing strategic philanthropy that leverages areas of competitiveness. The P-K framework, argues William Baue, draws its strength from applying corporate strategic thinking to both leverage positive social and environmental benefits and mitigate negative social and environmental impacts in ways that enhance competitive advantage. An obvious example of this, P-K stated, was Toyota’s development of the hybrid electric/gasoline car Prius. As environmental concerns increased, Toyota stole a march on major competitors such as General Motors and Ford by creating a series of innovative car models that have both produced competitive advantage and environmental benefits. Hybrid engines emit as little as 10 percent of the harmful pollutants conventional vehicles produce while consuming only half as much gas. Prius thus gave Toyota a lead so substantial that Ford and other car companies started to license their technology.
However, the well-known recent failures of Toyota in quality control, led to massive recalls and closed assembly lines. A Financial Times journalist noted that he ‘had driven a Prius straight into his garage door, not realising it was ready to go!’
The answer from Mr. Toyoda, CEO of Toyota: “I would like to point out that Toyota’s priority has traditionally been the following: First, safety; second, quality; third, volume. These priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before, and our basic stance to listen to customers’ voices to make better products has weakened somewhat. We pursued growth over the speed at which we were able to develop our people and our organization, and we should be sincerely mindful of that.” In other words, in today’s world, ignoring intangible assets (the bedrock of CSR) carries real costs for business.
Enough of Theory
What happens when these ideas are transformed into a strategic framework to enhance the competitive advantage of a company while preserving the values of CSR?
In 2008, MHC International Ltd worked out such a strategy for an oil company which we shall call Arrow Petroleum (AP). The following steps were identified.
- Report on where the key overall CSR trends are heading, including any legal requirements.
- Provide benchmark examples of CSR, and assess CSR trends. To draw upon other oil companies such as Premier Oil Consolidated who have won awards for their CSR approach.
- Analyze AP’s record in the light of GRI reporting guidelines and act accordingly.
- Identify AP’s existing CSR activities and projects to date with a view to identifying competitive advantage. Use MHCi’s rapid impact sustainable assessment model (RISAM), and judge their sustainability.
- Identify, according to the stakeholder model of CSR, key activities that AP could do, while bearing in mind (and identifying, at least qualitatively) the costs and benefits of additional CSR activities. Identify and interview key stakeholders as a pre-cursor to future, fully-fledged stakeholder dialogues. Note that Premier Oil, for instance, has as its stakeholders Owners and investors, Management, Employees, Customers, Suppliers, Government, Joint Venture Partners, Local Community. Also note that the process of stakeholder dialogue is more important for company performance than simply reporting on it.
- Interview only a selection of stakeholders in each category but attach importance to investors, suppliers and employees in the first instance. At this stage a fully-fledged stakeholder dialogue will not be carried out but will be something for the future.
- Make use of the industry standard Key Performance Indicators (KPIs for social, economic and environmental issues), as suggested by Global Reporting Initiative, and highlight which ones are most appropriate for AP.
- Provide data for as many KPIs as possible in the short-term and determine methodologies for calculating those currently missing over the long-term.
- Work out key next steps and alternatives toward establishing a fully-fledged CSR strategy for AP over a period of three years into the future.
In the past decade, CSR has seen much development. At one end of the spectrum it is used to emphasize corporate philanthropy only, and then we often hear of ‘CSR projects’. This notion can be found in some developed countries such as the USA but is mainly found in emerging markets across the world such as Pakistan and is intended to increase the sustainability of such projects. At the other end of the spectrum among many large corporations there is a much broader, system wide view of CSR where the concept is at the core of a company’s business strategy.
Moreover, the loss of reputation of Toyota and the collapse of firms such as Enron, Lehman Brothers, and (now largely in public hands) General Motors who all suffered from poor stra-tegic models shows that new business strategy models are essential. And, as argued here, a key message is that CSR is beco-ming a, if not, the, core of business activity. It is fast becoming acknowledged that a strategic stakeholder model of engagement with the business environment means that the potential for avoiding disasters and increasing success and innovation can be increased. CSR is obviously not a panacea for all ills but more and more companies are seeing that it can enhance their competitive advantage.