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CSR Lecture 2 A firm should be sustainable Many corporations have sustainability policies, practices and reports. What is corporate sustainability?

Sustainability 1. Social 2. Environmental 3. Economic Defining sustainable development Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs It contains within it two key concepts - NEEDS and, in particular the essential needs of the world’s poor, to which overriding priority should be given - LIMITATIONS on the environment’s ability to meet present and future needs Brundtland (1987) Development that: - “meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987) Sustainability aims to secure intergenerational equity - Most people want to live as well as their parents and they want their children to enjoy similar opportunities The same logic applies in business - Most managers want their business to be at least as profitable as in the past, and ideally, for profits to grow

Business sustainability can be defined as: - The ability of firms to respond to their short-term financial needs without compromising their (or others’) ability to meet their future needs. - Thus, time is central to the notion of sustainability and corporate sustainability Bansal & DesJardine (2014) Why sustainability matters for corporations According to the World Business Council for Sustainable Development (WBCSD) the key drivers for sustainability include: - Opportunities for cost reductions - Opportunities for technical efficiencies - Brand differentiation - Pressure from shareholders - Pressure from employees - Pressure from the government - Pressure from the regulators - Pressure from customers - Pressure from the general public

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John Elkington’s, The Triple Bottom Line (3Ps) The implies that the success of a company should be measured with respect to three aspects of performance: economic, social and environmental

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This implies that corporate objectives should: exceed profit, include impact on social issues and include impacts on environmental issues

Social This refers to fair and beneficial practices toward labour and the community region in which a corporation conducts its business - Corporations should pay fair wages - Corporations should invest some of its gains into the surrounding community through sponsorships, donations or projects that further the common good Environmental - This refers to the minimisation of environmental harm - Covers all business functions – from sourcing raw materials, to production processes; from shipping to administration - Covers the full life cycle of products and services, including disposal Economic - This refers to profitability - However, it focuses attention on an imperative to make an honest profit - This is because profit should be made in harmony with the other two aspects of performance - Also, the notion of economic sustainability focuses attention away from short-term financial gains, and towards financial returns (and the survival of the corporation) in the longer term -

Global 100 most sustainable corporations in the world Method - Large corporations (more than $1 billion revenue) - Screened-out some firms that are associated with egregious practices (including regulatory fines) or a weak financial position • Twenty-one key performance indicators: Energy Productivity / GHG Productivity / Water Productivity / Waste Productivity / VOC Productivity / NOx Productivity / SOx Productivity / Particulate Matter Productivity / Innovation Capacity / *Percentage Tax Paid / CEOAverage Employee Pay / *Pension Fund Status / *Supplier Sustainability Score / Injuries / Fatalities / Employee Turnover / *Women in Executive Management / *Women on Boards / *Sustainability Pay Link / *Sanction Deductions / *Clean Revenue - KPIs are chosen to fit industry contexts. Only the universal KPIs (*) are employed in all industries

Reading

Crane, A. and D. Matten (2007) Business Ethics: Managing Corporate Citizenship and Sustainability in the Age of Globalization - “Business ethics, it has been claimed, is an oxymoron” (Collins 1994) - Albert Carr (1968) ‘that business was not subject to the same moral standards as the rest of the society” - Business activity would be impossible if corporate directors always lied, if buyers and sellers never trusted each other; or if employees refused to ever help each other - Business ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed - “Business ethics is about the ‘grey areas’ of business” (Trevino and Nelson 2007) - The Times (Dearlove 2006) ‘business schools are taking up their ethic courses in the wake of recent corporate scandals’ Defining morality, ethics and ethical theory - “morality is concerned with the norms, values and beliefs embedded in social processes which define right and wrong for an individual or a community” - “ethics is concerned with the study of morality and the application of reason to elucidate specific rules and principles that determine right and wrong for a given situation. These rules and principles are called ethical theories” Why is business ethics important? - Consumers and pressure groups have increasingly demanded that firms seek out more ethical and ecologically sounder ways of doing business - The media has also kept a constant spotlight on corporate abuses and malpractices 1. The power and influence of business in society is greater than ever before. One recent poll of more than 20 leading economic nations revealed that almost 75% of residents believed large companies had too much influence on the decisions of their government (Cywinski 2008) 2. Business has the potential to provide a major contribution to our societies, in terms of producing the products and services that we want etc. 50% of business executives think that corporations make positive contribution to society 3. Business malpractices have the potential to inflict enormous harm on individuals, communities and the environment 4. The demands being placed on business to be ethical by its various stakeholders are becoming more complex 5. Few businesspeople have received formal business ethics education 6. Ethical violations continue to occur in business. A recent survey of over 1,000 UK employees working in public and private sectors found that one in three workers did not consider their employers to be fair Ethical fashion for ethics girls - An organisation that seeks to set the example in the ethical fashion, shopping and ideas.

Business ethics in different organisational contexts Large vs small

Small businesses typically differ in their attention and approach to business ethics As Laura Spence (1999) suggests, these differences include the lack of time and resources small business managers have available to focus on their ethics, their autonomy and independence with respect to responsibilities to other stakeholders - Large corporations tend to have much more formalised approaches with considerably more resources available to develop sophisticated ethics management programmes. They are constrained by the need to focus on profitability and shareholder value, as well as the very size and complexity of their operations Business ethics in private, public and civil society organisations - Private sector companies will tend to be responsible primarily to their shareholders or owners - Main responsibility of CSOs are to the constituencies they serve. Emphasise their missions and values - In the public sector, more attention is paid to higher level government and the general public - (Mollanen and Salminen, 2007) Typical ethical issues prioritised by government agencies will be those of rule of law, corruption, conflicts of interest, public accountability, and various procedural issues involved in ensuring that resources are deployed fairly and impartially -

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Globalisation Hank Paulson 2001 ‘the gospel of globalisation’ William Parrent (2006) ‘one effect of globalisation has been that risk of all kinds – not just fiscal, but also physical – have increased for businesses, no matter where they operate’ MNCs are at the centre of the public’s criticism on globalisation. They are accused of exploiting workers in developing countries, destroying the environment, and by abusing their economic power, engaging developing countries in a so-called ‘race to the bottom’

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Some people argue that there is nothing like a global economy, because roughly 90% of world trade only takes place either within or between the three economic blos of the EU, North America and Asia

What is globalisation - Globalisation is a process which diminishes the necessity of a common and shared territorial basis for social, economic and political activities, processes and relations 1. Technological in nature. The people we do business with, no longer necessarily have to be in the same place as we are 2. Political in nature. Freedom of place in Europe Cultural issues - New and diverse ethical demands - Moral values that were taken for granted in the home market may get questioned as soon as corporations enter foreign markets (Donaldson, 1996) - E.g. Europeans tends to regard child labour as strictly unethical, some Asian countries might have a more moderate approach - Globalisation results in the deterritorialization of some processes and activities, in many cases there is still a close connection between the local culture, including moral values - Globalisation makes regional differences less important since it brings regions together and encourages a more uniform global culture, but it erodes the divisions of geographical distances, globalisation reveals economic, political and cultural differences and confronts people will them Legal issues - The power of a government has traditionally been confined to a certain territory Accountability issues - MNCs own the mass media that influence much of the information and entertainment we are exposed to, they supply global products. For example in 2008, the gross domestic product of Greece was the same as the revenue of Wal-Mart (US$400bn). The Greek government has to be accountable for many people, whereas Wal-Mart is only accountable to few shareholders - The more economic activities get deterritoralised, the less governments can control them, and the less they are open to democratic control by the affected people - Globalisation leads to a growing demand for corporate accountability

New local challenges to address - The more it gets exposed to regions and countries where ethical values and practices are still vastly difference

Globalisation and the assimilation of different global regions - Globalisation has quite significantly reduced and mitigated some of the peculiarities of business systems globally - In Europe, this has been manifested in a decrease in the importance of governmental regulation for business activities Sustainability: a key goal for business ethics? - The environmental pollution, in particular the effects on climate change, caused by the production, transportation, and use of products such as cars, refrigerators, or newspapers - The ever increasing problems of waste disposal and management as a result of excessive product packaging and the dominance of the ‘throwaway cultureThe devastating consequences for individuals and communities as a result of plant closures and ‘downsizing’ as experienced throughout Europe - The erosion of local cultures and environments due to the influx of mass tourism in places as diverse as Thai fishing villages, Swiss alpine communities, or ancient Roman monuments

Sustainability - “refers to the long term maintenance systems according to environmental, economic and social considerations” The Triple Bottom Line - John Elkinton - Represents the idea that business does not have just one single goal – namely adding economic value – but that it has an extended goal set whicn necessitates adding environmental and social value too Environmental - There is a widespread conception within business that sustainability is purely an environmental concept - The basic principles of sustainability in the environmental perspective concern the effective management of physical resources so that they are conserved for the future Economic - Emerged from economic growth models that assessed the limits imposed by the carrying capacity of the earth

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The recognition that continued growth in population, industrial activity, resource use and pollution could mean that standards of living would eventually decline led to the emergence of sustainability as a way of thinking about ensuring that future generations would not be adversely disadvantaged by the activities and choices of the present generation Includes the companies attitude towards and impacts upon the economic framework in which it is embedded. Paying bribes or building cartels for instance

Social Explicit integration of social concerns into the business discourse around sustainability can be seen to have emerged during the 1990s - In response to concerns regarding the impacts of business activities on indigenous communities in less developed countries and regions - Social justice. 80% of the world’s GDP product belonging to the 1 billion people living in the developed world and the remaining 20% shared by the 5 billion people living in developing countries - ‘the widening gap between skilled and unskilled workers’ 8 Millennium Development Goals are to: - Eradicate extreme poverty and hunger - Achieve universal primary education - Promote gender equality and empower women - Reduce child mortality - Improve mental health - Combat HIV/AIDS, malaria and other diseases - Ensure environmental sustainability - Develop a global partnership for development -

Implications of sustainability for business ethics - Consider a diverse and complex range of considerations and concerns - Not notion of sustainability widely promoted by governments, businesses, NGOs and academia, it is vital that we understand its full implications and evaluate business ethics practices according to their performance along, and trade-offs between, the different dimensions of sustainability Business Sustainability: It is about time - The notion of time discriminates sustainability from responsibility and other similar concepts - Polman sees short-termism as the bane of sustainability - Business sustainability: “the ability of firms to respond to their short-term financial needs without compromising their or others ability to meet their future needs” - Firms are systems nested within large macro-systems - Sustainability requires trade-offs. Firms must choose between investing less for smaller profits sooner and investing more for greater profits later (Laverty, 1996) - Firms profit from exploitation by marketing and selling current products and services, but must also invest in exploration activities, such as research and development, to secure a future pipeline of products and services (March, 1991) Sustainability is not responsibility

CSR respresents the set of organisational activities that are good for society and the firm (McWilliams and Siegel, 2001) - Even the triple bottom line, which is how sustainability is often conceptualised, looks more like responsibility than sustainability because it misses the critical insight that sustainability requires intertemporal trade-offs Different outcomes - CSR aims to create share value by addressing competing stakeholder interest, however the focus on current stakeholder interests can obscure intertemporal tradeoffs - The pursuit of shared value can stimulate rapid, unsustainable growth, as firms seek ever-accelerating returns to generate wealth for the firm and society. Confusion between CSR and business sustainability - Acts of CSR create value for both business and society in the short run, but do not necessarily sustain the viability of micro and macro systems in the long run - E.g. charitable donations are responsible, but they are not sustainable if they do not resolve the underlying issue The threat to sustainability and strategy: short-terminism - Graham et al (2005) found that nearly four out of every five executives willingly sacrificed long-term value creation in order to smooth earnings or meet short term targets. - “suboptimal over the long run” (Laverty, 1996) - Humans have a bias for immediate gratification and temporal discounting (Loewenstein and Thaler, 1989) Mainstreaming sustainability in strategy - Short-termism is not sustainable, nor a good strategy -

Defining and Measuring Corporate Sustainability: Are We There Yet? Defining Corporate Sustainability - “the origin of the CS concept is mainly linked to the Brundtland report’s (WCED, 1987) definition of “sustainable development” as “development that meets the needs of the present without compromising the ability for future generations to meet their own needs” - Bansal (2005) defined “corporate sustainable development” as a three-dimensional construct based on economic prosperity, social equity and environmental integrity” - (Hart and Dowell, p1446) Sustainable development is not restricted to environmental concerns but also involves focusing on economic and social concerns. Since economic activity in developed countries is intimately connected with issues of poverty and degredation in less-developed countries, a strategy that considers sustainable development must recognise this link and act to reduce the environmental burden and increase the economic benefits for the lesser developed markets affected by the firm’s activities - Valente (2012) Firms need to find ways to interconnect social, economic and ecological systems using “co-ordinated approaches that harness the collective cognitive and operational capabilities of multiple local and global social, ecological and economic stakeholders operating as unified network or system” Commonalities and Differences Among Corporate Sustainability Definitions

As an example, Szekely and Knirsch’s (2005) definition calls for the need to balance the three CS pillars to then list 10 different dimensions to be sustained: (a) economic growth, (b) shareholder value, (c) prestige, (d) corporate reputation, (e) customer relationships, (f) product quality, (g) ethical business practices, (h) sustainable jobs creation, (i) value creation for all the stakeholders, and (j) attention to the need of the underserved. Even though we would agree on the need to sustain all these different dimensions, this description may seem overwhelming to the eyes of any researcher attempting to measure firms’ CS. Organisational Theories We Use Stakeholder Theory - Managers must keep both shareholders and stakeholders interests in mind when implement new strategies - CS researches extensively used stakeholder theory to explain firms drivers for undertaking CS strategies - Sharma and Henriques (2005) showed how stakeholder pressures made the adoption of advanced environmental practices in the Canadian foresty industry possible Institutional Theory - The premises of institutional theory to help explain the institutionalisation processes surrounding the emergence of sustainable industries - Husted and Allen (2006) found that institutional pressures are more important than the strategic analysis of stakeholders when multinational enterprises were implementing CSR practices abroad New Theory for Corporate Sustainability - Bansal and Gao (2006) emphasises the opportunity that CS scholars have to push new theoretical and frontiers based on insights that are unique to the natual environment - Gladwin et al (1995) introduced the term sustaincentrism as the process of achieving human development in an inclusive, connected, equitable, prudent and secure manner -

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