Held at the RSA, April 7, 2005
Words from John Drummond, Chief Executive, Corporate Culture
The argument
“The selfish pursuit of profit serves a social purpose”. That is how The Economist editorial in January anchored the case against CSR. In that way, The Economist has linked a debate on CSR to a debate on the purpose of business and I welcome that debate. So I’d like to begin by challenging the assumption that the primary purpose of business is profit for shareholders.
In my view the primary purpose of business is not profit – it is to create products and services that people value. If they do this successfully, shareholder value follows. What that means at its most successful is showing consumers “the difference my products or services make to your life”. Why does this matter? Because I am convinced that business does not have an economic goal at its heart but a social goal.
Everything comes together not with the shareholder but with the customer and here is the gulf between us. The original Economist article argued that social goals were externalities. I argue that business is the engine behind most social progress by providing cars, planes, food, drink, water, energy, leisure, health, information and all the fundamentals we need to live. If it is going to have that freedom to deliver social benefit and do it in a way that is profitable to company owners, it must retain the trust of consumers.
I am clearly not alone. In original research Corporate Culture commissioned for this event through Opinion Leader Research, we asked 100 people from business, politics, the City and the media for their views. Only 10% said that companies that engaged in CSR cheated their shareholders. Around 70% agreed that the primary purpose of business should be to create products and services that customers value and in that way shareholder value will follow.
But let’s focus for a few minutes on the core proposition – that companies engaging in CSR are digging their own graves.
The starting point is to pin down what we mean by CSR. My view is that CSR is about effective corporate governance, listening to stakeholders, motivating employees, investing in their training and development, caring about how your products are sourced, reducing energy use and many others practices. I simply do not accept that The Economist is seriously arguing that these practices are not in the best interests of business.
Consider these words: “Some business practices often labelled as CSR raise profits and advance society’s well-being at the same time.” Not my words, but the words of Clive Crook in the original survey of CSR in The Economist.
On this we agree. There are good examples of how CSR can also have commercial benefit. There are also bad examples of CSR but these bad examples challenge the practice of corporate responsibility not the principle. Otherwise, the very many companies who go bankrupt every year could be reasonably seen to challenge the principle of capitalism and I don’t buy that.
Effective CSR is designed to deliver commercial benefits. And there are five main areas of benefit. One of them is to improve results. The others are to comply with regulation and legislation, to reduce risk, to improve reputation and to improve relationships with stakeholders.
I believe there are around 10 arguments that “managing CSR effectively simply makes perfect commercial sense for business”. (Summary attached).
In January, The Economist argued that good corporate citizens believe that capitalism is wicked but redeemable. Nonsense. Who are these corporate citizens who believe that capitalism is wicked? If you believe that you would imagine the advocates of CSR are do-gooding backstreet evangelists. The fact is that CSR is a business led practice and many of the strongest advocates of it are the same people who run the world’s most profitable businesses.
In the original article, Clive Crook said that the movement for corporate social responsibility has won the battle of ideas. It is honourable of him to admit defeat in this debate before it has begun but not sensible. There is a debate to be had here and we should all thank The Economist for triggering it. But as we do so, let’s stick to reason not rhetoric.
Final words
Today, it has been CSR on trial. I would like to suggest a return match and that The Economist holds another debate entitled: “Companies who put shareholder value as their sole purpose are digging their own graves.” We have not touched today on where a true shareholder value only philosophy can take a business. For example, the search for shareholder value often leads to unsuccessful mergers and acquisitions. According to KPMG, 70% of mergers and acquisitions fail to achieve their objectives or raise shareholder value; of these 39% actually lead to lower returns for investors. *
But let’s be clear. The opposite of responsible business practice is irresponsible business practice. That is the way to loss of trust in business. It is the way to tighter regulations. It is the way to lose employee commitment, customer loyalty and shareholder value. It is not responsible business people who are digging their own graves. The opposite is true. Companies who deliberately overlook responsible business practices are digging their own graves. Worse. They are digging the graves of others.
At the end, it comes down to what you believe. What do you believe inspired Karl Benz to build the first four-wheel drive motor vehicle in 1886? What do you believe motivated Gates and Allen when they offered the first Altair microcomputer kit for sale in 1975?
If you look at the origin of most businesses, commercial progress and social progress go hand in hand. They always have. Companies are rediscovering that. The motion is that companies practicing CSR are digging their own grave. Not true. This is not a funeral we are witnessing. It is a birth. Thank you.
The 10 arguments for CSR
1. The legal argument: A great deal of CSR is a regulatory or legislative requirement on business so we cannot ignore it. That includes legislation on employment, the environment, reporting and in many other areas. Complying with the law cannot be commercial suicide.
2. The “good management” argument. Even if we were to take the narrow definition of this just being about the community and the environment, the fact is business has an impact on society. The only real question is “do you manage it or choose not to manage it?” And why would any well managed business choose not to manage it?
3. The cost saving argument. Well managed CSR has commercial value. Let’s look at BT. This company has secured savings of £600m in the last 10 years by managing its environmental impact. It simply makes good business sense.
4. The “customer satisfaction and customer loyalty” argument: Again, BT research shows that customer satisfaction for them is down to four things – price, quality of products, the customer experience and image and reputation. Image and reputation is the biggest single factor - accounting for 40% of total customer satisfaction and positive press linked to CSR is a major contributor to image and reputation.
5. The “increased sales” argument: Let’s stick to BT. This company has also shown through cause related marketing programmes associated with a cause that you can directly improve the sale of products and services. Their promotion of the Speaking Clock service linked to ChildLine showed a 4% increase over the year, bucking a net 8-10% decline over the last 10 years and raising £200,000 for ChildLine Again, there are other examples and I’m happy to share them.
6. The cost to profit when CSR principles are ignored. McDonalds would be the first to admit that the attack on the company linked to obesity and the mix of items on the menu had an impact on their business success. Here are some other examples. The Carnival Corp, the major world cruise group, pleaded guilty in US District Court in Miami to ocean pollution charges, and is to pay an $9m fine as a result. And black workers at NASA's Goddard Space Flight Centre and Wallops Island Flight Centre were awarded a $3.75 million settlement following claims that they were systematically denied promotions.
7. The “intangibles” argument: Let’s look at investors. I am one. When I am investing in a business, short term financial success is only one factor. The fact is I am investing in the future not the past. So I am immediately interested in non-financial information – strategy, the skills of the management team, customer loyalty, intellectual capital, the strength of the brand, employee skills, competitive advantage and positive relations with stakeholders. It is often the intangibles like the brand that add to capital value. And you have to ask what the constituent elements of the brand are – and one of them is trust. Is The Economist seriously suggesting that only tangibles matter in a judgement of business success?
8. The “externalities” argument. The Economist argues that externalities are the role of governments not business. But let’s look at this. Are there any occasions where externalities are either business risks or business opportunities? Of course there are. Global warming is a potential risk for car manufacturers, oil companies and civil aircraft companies. The lack of mathematics, science and engineering skills among young people is a potential risk for engineering companies. The fact that people are living longer has a major impact on the pension schemes of all companies and, with high disposable incomes, elderly customers are a major opportunity. The idea that externalities are not critical for business success defies commercial logic.
9. The “beliefs” argument: My conviction is that employees do not just come to work for money. They also want to work with people they like, with a sense of purpose and meaning, with companies that know that getting the best from them usually means helping them achieve their goals in life. The fact is that it does matter to many companies that people want more time, energy, health,
fun and meaning as well as more money.
10. The “opposites” argument: Maybe one stark way of looking at this is to break CSR down into its constituent parts and look at their opposites. For example: Does it really make sense for companies not to invest in the skills of employees? Does it really make sense for companies not to consider health and safety at work? Does it really make sense for companies not to save money by managing their energy use? Does it really make sense for companies to include ingredients in food that are harmful to health? Come on?
A growing number of young American managers are looking outside the US to study, at home many are thinking twice about the investment of 20 months and $100,000 required to get an MBA from a good US business school. Over the past two years, the number of applicants for places on MBA courses has fallen sharply. [...]
"Business schools are institutionalising their own irrelevance," write Warren Bennis and Jim O'Toole, professors at the University of California's Marshall School of Business, in the Harvard Business Review.
They are not alone in calling for change. Longstanding critics of US management education, such as Henry Mintzberg of McGill University in Montreal and Jeffrey Pfeffer of Stanford's Graduate School of Business, have been joined in recent months by establishment figures such as Dipak Jain, dean of Northwestern University's Kellogg business school, Laura Tyson, dean of London Business School and Jeffrey Garten, the outgoing dean of Yale.
The EBEN Research conference 'Ethics in leadership: Ethical Challenges in Economic, Political and Social Reality’ will take place at the Reval Hotel Olympia and at EBS, on June 16-18, 2005, in Tallinn, Estonia. You can registrate to the conference with early bird fee (200€ to EBEN members / academics / presenters and 150€ to students) until May 1st. Conference registration and accommodation details: http://www.ebs.ee/index.php?id=2660
More detailed information can be aquired from the web-site http://www.ebs.ee/index.php?id=2218.
The 8th annual conference of the Environmental Management Accounting Network in Europe (EMAN-EU). The central theme of the EMAN conference 2005 is "Corporate Social Responsibility and Innovations in Management Accounting". The conference website is open for registration now. A link can be found on the EMAN website http://www.eman-eu.net, http://www.eur.nl/fsw/english/research/eman/about
The conference will be held on Tuesday 10th and Wednesday 11th May 2005 at the Erasmus Centre for Sustainability and Management (ESM), Erasmus University Rotterdam, The Netherlands. A post conference activity, presenting the results of a Dutch research programme on accounting and non-accounting dimensions of Corporate Social Responsibility, will be organised on Thursday 12th May.
Leadership training lacks vision
By Morgen Witzel
Published: April 3 2005 18:37 | Last updated: April 3 2005 18:37
Kofi Annan, UN secretary-general, has been cleared of wrongdoing over the oil for food scandal in Iraq, but he remains under pressure. Some now regard Mr Annan as a weak leader who failed to prevent the scandal. He is not the only high-profile leader under pressure at the moment; last week, Phil Purcell, Morgan Stanley's chairman, responded to continuing criticism of his leadership of the bank by firing several top executives.
Is there a wider crisis in business leadership? Two recent studies suggest so. In an article in the latest issue of the Harvard Business Review, David Rooke of Harthill Consulting and William Torbert, professor at the Carroll School of Management in Boston, find that 55 per cent of leaders are associated with below-average corporate performance. Only 15 per cent of the leaders they studied over 25 years showed a consistent ability to manage innovation and organisational change.
The UK's Chartered Institute for Professional Development last week published a report suggesting that many companies are suffering from a shortage of effective leadership. Particularly disturbing was the CIPD's conclusion that, though companies are investing large sums of money in leadership training, such training is failing to deliver the skills that leaders need if they are to be effective.
The research suggests that companies need to look again at the way they train and develop leaders. Managers should bear in mind, though, that training cannot work miracles. Professor Peter Case of the Centre for Leadership Studies at the University of Exeter cautions against treating training as a "philosopher's stone" that will automatically produce successful leaders. Leadership requires good raw material to work with, and leaders must have some inherent ability if training and development are to make a difference.
Nonetheless, virtually every successful leader in history has had a tutor or served an apprenticeship that taught them necessary skills. Alexander the Great studied under Aristotle; in modern times, Jack Welch trained as a junior engineer at General Electric before rising to become its leader. Both men's approaches to leadership were shaped by their early experiences. Natural intelligence and ability are essential for leading, but it is just as essential that these qualities be developed and enhanced.
If training and education can turn a potential leader into an actual one and make good leaders better, what is wrong with the current approach to training and development?
First, consider what needs to change to make a leader more successful. Rooke and Torbert argue that the factor that determines leadership success is what they call "action logic", in other words, how a person views the world around them and reacts to challenges and threats. Further, they believe that underperforming leaders can be helped to change their action logic.
Such leaders fall into several categories, including "opportunists" who seek to manipulate others to protect their own position or "diplomats" who try to avoid conflict and please everyone at the same time. Mr Annan is a classic example of a diplomat in this sense.
With training, suggest Rooke and Torbert, leaders can move to a different level, becoming, for example, a "strategist" - someone with long-term vision who sees barriers to change as a series of challenges to be overcome - or an "alchemist", someone who can reinvent an organisation and draw people to share his or her vision almost effortlessly; the authors cite Nelson Mandela as an example.
Another great alchemist was Pierre du Pont, who in the early twentieth century built up first his family company, Du Pont, and then General Motors to be world-class organisations. Du Pont had a genius for transforming companies, which he achieved mainly by recruiting top-flight management teams who shared his vision and knew how to achieve it.
Henry Heinz, who created one of the world's most enduring brands, may be regarded as a great strategist. Heinz systematically overcame all barriers to growth, at least in part through a sense of personal belief in his company and its mission to provide people with safe, high-quality food.
But are leaders getting the training they need to achieve such transformation? Richard Bolden, research fellow at the Centre for Leadership Studies at Exeter University, believes not. In a recent research paper, Mr Bolden criticises one of the most common approaches to leadership development and assessment: leadership competency frameworks.
These are lists of defined skills and abilities that each company believes it requires from its leaders, such as the ability to think strategically, communications skills, analytical skills, the ability to manage change and so on. Leaders and potential leaders are measured against these frameworks, and analysis of the resulting gap shows where skills and training are required.
Most competency frameworks currently in use, says Mr Bolden, concentrate on such skills. The problem, he adds, is that personal skills and abilities are necessary, but not sufficient, for leadership. While most competency frameworks focus inward, on the leader, leaders themselves are usually looking outward, trying to make sense of the world and their place in it. His study shows that the leadership issues of greatest concern to leaders themselves - vision, trust, personal belief, ethics, moral courage - are not included in most competency frameworks. The emotional, ethical and cultural aspects of leadership, he says, are being sidelined or ignored.
The social aspects of leadership have long been known. In Leadership in a Free Society, published in 1936, Thomas North Whitehead, a Harvard academic, observed that leaders are social beings with attitudes and actions strongly shaped by those they lead; leadership is not a case of those who give orders and those who follow them, but is an interaction between leaders and subordinates.
Others have reinforced the importance of wider aspects of leadership. Warren Bennis, a noted writer on leadership and professor at the Marshall School of Business, has argued that the key dimensions of leadership include factors such as vision, meaning, trust and self-knowledge. These are not skills that can be taught by rote; they are personal qualities that must be nurtured and developed.
What happens when leaders lack these qualities? Len Sayles, professor emeritus of management at Columbia University, argues that many corporate scandals of recent years came about at least in part because leaders began to believe in their own mythical status.
Like the "masters of the universe" satirised by Tom Wolfe in The Bonfire of the Vanities, top managers sought personal glory and reward over the interests of their business, and chased short-term financial performance instead of long-term sustainability. Kenneth Lay of Enron and Bernie Ebbers of WorldCom would have scored highly on most measures of personal leadership skills, but vision and trust were replaced by the ability to finesse the numbers and look good on television. We all know the result.
So, how can companies get the leaders they need? Training in communications skills, empathy and analytical ability is certainly necessary. Yet much more is needed. Leadership training programmes that assume human and social qualities are already present in the leader - that all that is required is the development of skills - are doomed to fail.
Mr Bolden's research suggests that it is precisely in the area of personal, ethical and emotional development that leaders themselves are calling for help. A shift in leadership training away from generic skills and towards personal development may be the only answer.
Open Seminar "Social Responsible Investment becomes mainstream within two years, Where do we stand?", Vlerick Leuven Gent Management School, Belsif, Campus Gent,Thursday 12 May 2005 – 2pm-6pm.
The seminar will debate about the future of SRI and more especially address one of the key challenges of integrating SRI into mainstream financial analysis. It will address questions such as: Is SRI research taken into account in portfolio construction of mainstream fund management? Is integration the future of SRI? What does it mean in terms of SRI research: in-house or out-sourcing? Do financial analysts have information that SRI analysts don’t have and visa versa?
In line with EABIS’ role as a business-academic
partnership and learning forum, the annual event will again mobilise
thought leaders from companies and business schools - as well as other
stakeholders such as policy-makers and NGOs - from Europe and around
the world. It will explore issues such as corporate responsibility,
competitiveness and the development of knowledge, skills and mindsets
for today’s and tomorrow’s managers and leaders. There will also be a
marketplace / learning exchange for education and training experiences
and innovations. A 1-day workshop for PhD students will also take place at the event on Sun 4th Dec.
An initial programme as well as a “Call for Academic Papers and Business / Other Practioner Inputs” will be available in the coming weeks along with registration details. Please hold the 5-6 December 2005 in your calendar
for what promises to be another highly successful event for business
representatives, academics and other stakeholders to share and learn!
If you have any queries please send them to:info@eabis.org
* The new dates replace the original intention to hold the event on 19-20 September 2005.
The European Commission presented its proposal for the Seventh Research Framework Programme (FP7) on the 6th April. With a proposed budget of nearly 68 billion euro a few highlights include:
Simpler rules for the running and evaluating EU research projects
Focus on nine thematic areas, including social sciences and humanities
Creation of an independent European Research Council
Unsurprisingly corporate responsibility is not named as one of the 9 major thematic areas. Nevertheless, with an increased budget and focus on socio-economic science and humanities, prospects for further inclusion of the topic seem hopeful. Relevant areas identified by the Commission at this stage could be:
“Combining economic, social and environmental objectives in a European perspective”
“Major trends in society and their implications: such as demographic change including ageing and migration; lifestyles, work, families, gender issues, health and quality of life; criminality; the role of business in society and population diversity, cultural interactions and issues related to protection of fundamental rights and the fight against racism and intolerance”
The research framework programmes are the European Union’s main instrument for research funding. The current programme – the Sixth Framework (FP6) - runs from 2002 to 2006 and has an overall budget of almost 18 billion euro. EABIS’ CSR Platform and RESPONSE projects are both funded by FP6.
The proposal will now be debated by the Member States (Council) and the European Parliament, before a final decision is taken sometime in 2006. First step is an in-depth debate in June in the Competitiveness Council.
Major discussions are likely to evolve around the amount of the overall budget, the division amongst priority themes and the prioritisation of the themes themselves.
EABIS is monitoring progress on FP7 and will continue its efforts to highlight the importance of more and better knowledge on business in society related issues amongst EU policymakers and officials. Discussions will take place over the coming 2 years with a view to raising resources for research on corporate responsibility across Europe and to identify opportunities for members of EABIS’ network.
New publication by AccountAbility in association with KPMG Netherlands is available on the Intranet in EABIS Member Library
‘Assurance Standards Briefing’ includes a comprehensive technical comparison of the AA1000 Assurance Standard and IFAC’s ISAE3000, and so points the way to both the differences between them, and the pluses from using them in combination. This excellent and strategically important piece of work has been prepared by Jennifer Iannsen-Rogers and Jeannette Oelschlagel as part of a longer-term research collaboration between AccountAbility and KPMG.
We would also like to bring your attention to two other standards documents we have recently released. The first, prepared by AccountAbility together with the GRI, is an executive briefing on the ‘future of corporate responsibility standards and frameworks’. This piece, prepared on our side by Peter Raynard and Jeannette Oelschlagel, was first released at WEF/Davos, then at the ISO SR meeting in Salvador last month and has now been made more widely, and again freely, available. The second is the latest issue of our journal AccountAbility Forum. This focuses on the ‘future of corporate responsibility standards’ and includes contributions from a wide range of practitioners and policy makers from Transparency International, Eskom, the Asia Monitor Resource Centre, the GRI, and the Harvard Business School.
Together (and with the recently released ‘Future of Sustainability Assurance’ prepared by AccountAbility in association with ACCA), we hope that these documents will add depth and breadth to our contribution to emerging standards and practices. Most of all, we hope that you will find this work useful, and so take forward information about them to your colleagues, members and wider networks by circulating the press release and web links to the main download area.
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