Ashridge Business School
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Ashridge Business School
http://www.ashridge.org.uk
The Eighth Ashridge MBA Essay Award
in Association with
The European Academy of Business in Society
and Supported by Microsoft
The Responsibilities of Business in a Knowledge Economy
Short-Listed Essays
Ashridge Business School
http://www.ashridge.org.uk
Ashridge Business School
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CONTENTS
INTRODUCTION
WINNER: HYUN-SEUNG ANNA KIM
Judge Business School, University of Cambridge
Corporate Social Responsibility: A marketing gimmick, an enemy
of a free society or the business of business?
RUNNER-UP: HITOMI IMAI
Judge Business School, University of Cambridge
The Role of Public Policy in Promoting CSR
Gladys Diffey – Warwick Business School, University of Warwick
CSR, A Risky Business – Risk Management and CSR
Kaushalendra – Instituto de Empresa, Madrid
Competitive or Responsible: Resolving the dilemma
Ng See Hua – Instituto de Empresa, Madrid
In Anticipation and in Actualisation
Ashridge Business School
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Ashridge Business School
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Introduction
Ashridge has been challenging MBA candidates to produce thought provoking essays on
the changing role of business in society since 1999. The Ashridge MBA Essay Award was
established to further debate about questions of corporate responsibility and
sustainability, and to do so in a way accessible to a wide audience, particularly to
business leaders and public policy-makers.
The award also aims to raise awareness about the relevance of these issues to
mainstream management education. Integrating discussion, debate and reflection about
these issues into the learning experience of future business leaders is critically
important, and we are therefore delighted to be partnering for a third time with the
European Academy of Business in Society – an alliance of 80 companies, business
schools and academic institutions committed to integrating business and society issues
into the heart of management education in Europe. We are also delighted that, for the
second year running, Microsoft Europe – one of EABIS’ five founding corporate partners
– has supported these goals in partnering with Ashridge and sponsoring the award on a
topic which is central to the company strategy.
In 2007, as in 2006, the award encouraged MBA candidates to specifically reflect on the
dilemmas, challenges and opportunities for organizations operating where societies are
making a transition to a ‘knowledge economy’, reflecting the European Commission’s
Growth and Jobs Partnership Agenda. Three key questions were posed:
What are the new responsibilities of business in a knowledge economy?
Can business contribute to growth, employability and competitiveness in an
increasingly convergent international context, and if so how?
How should business leaders and policymakers approach these challenges?
We were pleased to receive once again a strong response from MBA candidates at
business schools across Europe. The shortlisted essays are collected here. Kaushalendra
and Ng See Hua, both from Instituto de Empresa, Madrid, Hyun-Seung Anna Kim and
Hitomi Imai, both from Judge Business School, Cambridge, and Gladys Diffey from
Warwick Business School have all approached these questions with intelligence and
imagination.
As ever, we are indebted to our panel of independent judges, who have devoted their
time and effort in selecting a winner (who will receive €6000) and a runner up (who will
receive €2000). The judges are:
Sir Paul Judge, Benefactor of Judge Business School, Cambridge University
Margaret Studer, Corporate Vice President, Diversity and Selection, Cargill
Jeanette Purcell, Chief Executive, Association of MBAs
Eric Cornuel, Director General, European Foundation for Management
Development
Rachel Jackson, Head of Social and Environmental Issues, Association of
Chartered Certified Accountants
Viscount Etienne Davignon, Chair, European Academy of Business in Society and
Vice-Chair, Suez-Tractebel
Finally, we are also indebted to all the MBA candidates who submitted entries to this
year’s competition. Their efforts demonstrate the very high quality of thinking which is
pushing forward the debate surrounding the changing role of business in society in a
knowledge economy.
Kai Peters, CEO, Ashridge
Ashridge Business School
http://www.ashridge.org.uk
EABIS is once again delighted to partner with Ashridge for the 2007 European MBA Essay
Award and to acknowledge for the second successive year the active support of
Microsoft, one of EABIS’ five founding corporate partners. This initiative gives students
from EABIS member institutions and other European business schools an excellent
platform to demonstrate their understanding of a rapidly changing business environment
in which they will soon play a role as the next generation of young managers and
leaders.
EABIS itself, supported also by the European Commission, operates a unique model of
partnership involving 80 member companies, leading business schools and affiliate
networks connecting over 3500 other companies around corporate responsibility issues
in research, education and training. Understandably, stakeholder engagement underpins
the success of such an organizational construct.
What distinguishes the Ashridge Award, however, is that it recognises MBA students as a
key stakeholder group and potential driver of change in the process of mainstreaming
corporate responsibility into management education. Through this initiative, Ashridge
has raised the bar for the European MBA community to do likewise. The “clients” of
business schools are increasingly looking for the role of business in society to be
addressed in their core programmes.
Against a complex backdrop of the political, social and environmental pressures linked to
globalization, and the EU Commission’s stated objective of transforming the continent
into a knowledge economy, companies are recognizing the need for a new profile of
manager and leader. This calls for business school students, among others, to be
equipped with different skills that enable them to manage ethically, sustainably and
profitably, going far beyond the traditional, often narrow understanding of how to
maximize shareholder value. Encouraging MBAs to reflect on these “macro” issues is a
vital way to improve awareness and support systemic change.
EABIS is therefore delighted to collaborate with Ashridge and Microsoft on this Award.
We would like to acknowledge the outstanding levels of contribution from all of this
year’s entrants, and hope that their thought leadership in 2007 is a true indicator of
progress in the European MBA community in the context of knowledge development for a
new economy.
Prof. Gilbert Lenssen
President, EABIS
Peter Lacy
Executive Director, EABIS
Ashridge Business School
http://www.ashridge.org.uk
Microsoft is very pleased to support this award as a way to foster research and
knowledge development in fields that are at the frontier between technology and society.
ICT represents a key driver for social and economic change, both in developed
knowledge-based societies and in emerging markets around the world. In supporting this
award we are pleased to hear different perspectives, support creative thinking and new
research on how and where the combination of responsible business practices,
innovation and core competencies together with multi-stakeholder partnerships can
make a difference to the goals of long term sustainable economic growth and social
development.
Building on our global commitment to use ICT for capacity-building efforts and extend
the benefits of technology to the next one billion people by 2015, we aim to better
understand how we can work with others and service society better, how to develop and
deploy technology solutions that are accessible, affordable and relevant for all. We see
technology as a great catalyst for people all over the world in matters ranging from
support to education, training and employability, ICT4Development, e-government
services, support to SMEs and entrepreneurship, online safety and security, e-readiness
for disaster relief and humanitarian assistance, and others.
Microsoft’s mission is to help people and businesses across the world to realise their
potential. An award is a good way to celebrate people’s potential, to reward effort and
passion, to stimulate others and ourselves to do better, everyday. With this in mind
Microsoft would like to thank all those who have helped organise and promote the award
and make it a success. A particular thank you goes to all those MBA candidates that
have taken time to submit their entry to the competition and a special congratulation to
the winner and the runner up. The efforts of many will make the difference and we are
keen to share the outcomes of the award widely, for the benefit of everyone in the
knowledge-based society.
Elena Bonfiglioli
Director Corporate Citizenship, Microsoft Europe, Middle East and Africa
Chair EABIS Business Group
NB. The essays that follow are reproduced here in the form they were submitted and
have not been proof read, edited or formatted. An edited edition will be published
and will be available online shortly.
Ashridge Business School
http://www.ashridge.org.uk
More about…
...Ashridge
Established in 1959, Ashridge is one of the world’s leading business schools. Its activities
include open and tailored executive education programmes, MBA, MSc and Diploma
qualifications, organisation consulting, coaching, applied research and online learning. In
the 2007 Financial Times rankings for tailored executive education, Ashridge is ranked
number one in the UK, number three in Europe and tenth globally. It is one of a select
number of business schools to be accredited by all three main business education
bodies: The Association to Advance Collegiate Schools of Business (AACSB); The
European Quality Improvement System (EQUIS) and The Association of MBAs (AMBA).
For more than a decade Ashridge has been at the forefront of debates on the changing
role of business in society through its thought leadership, research, management
development and consultancy. Ashridge is proud to be a founding partner in EABIS and
one of the first business schools to adopt the UN Principles for Responsible Management
Education.
...Microsoft
It’s hard to believe that Microsoft is already 30 years old. The company that made
Redmond, Washington, a household name was actually founded in 1975 in another city
by two young Seattle men, one of whom was a college dropout. From this inauspicious
beginning came an equally improbable vision: A personal computer on every desk and in
every home. Thirty years later, it seems so obvious. But at the time, when only a
handful of people knew what a personal computer was, it was a great leap of faith and
daring.
This revolutionary idea not only made technology a powerful tool for all of us, it also
created a new industry that changed our world. Today, we continue to expand the
possibilities of personal computing by developing new ways to empower our customers
anytime, anywhere, and on any device.
...the European Academy of Business in Society
Launched in 2002, the European Academy of Business in Society (EABIS) is a unique and
growing alliance of 80 leading companies and business schools, with the support of the
European Union Commission, committed to understanding and integrating corporate
responsibility into business theory and practice. Through collaborative partnerships on
research, education and training, and in particular MBA programmes, EABIS aims to
answer the challenges of developing corporate responsibility knowledge and skills for
today's and tomorrow's managers. To find out more visit www.eabis.org
Ashridge Business School
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WINNER
Corporate Social Responsibility: A marketing gimmick, an enemy of a
free society or the business of business?
HYUN-SEUNG ANNA KIM
Ashridge Business School
http://www.ashridge.org.uk
Ashridge Business School
http://www.ashridge.org.uk
Corporate Social Responsibility:1
A marketing gimmick, an enemy of a free society or the business of business?
- Practical responses to criticism from both sides: CORE activities2 and Socially Responsible Investment
Introduction
Like it or not, Corporate Social Responsibility (CSR) has clearly gained momentum as one of the
most important issues across the business and academic community, as well as among various
stakeholder groups. Triple bottom line accounting33 becomes common practice, so does publishing
an annual CSR report. While the Dow Jones Sustainability Index and the FTSE4Good Index are
chasing the financial performance of the leading sustainability-driven corporations, Beyond Grey
Pinstripes is announcing the ranking of business schools based on their curricular and research
related to social and environmental issues.
However, strong criticism from both the left and the right makes us hesitant to declare the whole
new era of corporate social responsibility. Many critics believe that most of so-called
CSR activities are nothing but a deceptive marketing tool, such as greenwashing. Can British
1
In this paper, the terms ‘Corporate Social Responsibility (CSR)’ and ‘Corporate Responsibility’ are used
somewhat interchangeably. Although the term ‘Corporate Social Responsibility’ sometimes refers to only
one part of ‘Corporate Responsibility’, in tandem with ‘Corporate Environmental Responsibility’ and
‘Corporate Financial Responsibility’, CSR is often understood at a broader
level, including environmental concerns. At a first glance, this general usage is probably acceptable
regarding the expanded definition of ‘society’. But even more importantly, it is becoming harder to draw
the line between the responsibilities of business to its shareholders and/or stakeholders and those to the
society as a whole, coupled with the emergence of institutional investors. This point
will be discussed further through the section about Socially Responsible Investment (SRI).
For the distinction between those two terms: World Business Council for Sustainable Development,
Meeting Changing Expectations –WBCSD’s first report on Corporate Social Responsibility, 1999
2
The term ‘CORE activities’ is coined by the author in this paper, in order to address “the
commitment by business to behave in socially and environmentally responsible ways through its core
activities”, as opposed to ‘add-ons’ or philanthropic activities. The dual meaning of ‘CORE’ emphasises
the link between core activities of business and ‘COrporate REsponsibility’.
The idea of this term is originated from the name of CORE (COrporate REsponsibility) Coalition, comprised
of WWF (UK), Amnesty International, Action Aid and Friends of the Earth. But the author injected the
dual meaning with her own idea about the link with core activities, and has not come across the same or
similar kind of usage during her research.
3
A measuring and reporting framework to take into account environmental and social performance of an
organisation, in addition to its economic (financial) performance. Also known as “People, Planet, Profit”
1
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American Tobacco4 be a ‘responsible’ cigarette manufacturer? Is Nestle really moving towards
social values, or simply trying to wash its image around the baby milk and other ethical issues by
putting a Fairtrade label on its 0.2% of coffee product line? From the green policy of oil giants
BP and Shell to the childhood obesity research fund of McDonald’s, the list of controversial
CSR examples is not exhaustive.
On the other side, Milton Friedman's famous maxim remains still strong; “there is one and
only one social responsibility of business – to use its resources and engage in activities designed
to increase its profits so long as it stays within the rules of the game, which is to say, engages in
open and free competition without deception or fraud.”5 Despite a great deal of research to
demonstrate a positive impact of CSR on the financial bottom line in the long run, the correlation
is often arguable, partly due to the difficulty in measuring the impact. Therefore, many people
think there is a trade-off, or at least a tension, between CSR and shareholder value – just as
Friedman criticized CSR as ‘doing something good at the expense of stakeholders, especially
shareholders’ thirty-seven years ago.
Not surprisingly, there are many advocates of CSR who have come up with the
counterargument against criticism from both sides. But practical responses are often more
powerful than theoretical ones, and I am convinced that special attention should be given to a
couple of practices – CORE activities and Socially Responsible Investment (SRI). The efforts to
organise core activities of business in more responsible ways suggest the potential of CSR
beyond corporate philanthropy and/or a marketing technique. SRI poses a fundamental question
about corporate responsibility and shareholder value. What if investors actually
want socially responsible practices as well as a decent rate of return? If this is the case, the
underlying assumptions of the Milton Friedman argument will be significantly challenged.
Although it is hard to tell or predict the future of CSR, these trends present one possible
scenario about CSR as the core business of business. This essay will discuss some recent examples
related to these practices, the reason why these trends are particularly significant,
and the potential implications on the new paradigm of CSR.
CORE: COrporate REsponsibility through core activities of business
When people say that the business of business is business only, obviously the primary
emphasis is put on the profit-generation activities of corporations, but it also reflects the
assumption that CSR activities are pretty independent from the core operations of business.
In other words, corporate philanthropy and charitable donation are often regarded as a big
4
5
BAT is the only tobacco company which was included in the Dow Jones Sustainability World Index.
Friedman, M. The Social Responsibility of Business is to Increase its Profits, The New York Times
Magazine, 13 September 1970
2
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part of CSR, which is separable from the business and nothing but an ‘add-on’ for the ‘good cause’.
Although there might be nothing wrong with corporate giving or individual
philanthropic actions6, these are often criticised as hypocritical programmes, to distract the public
from the ethical issues around their core operations.
For instance, Samsung Group is often cited as a responsible company in Asia, through its wide
range of grants and philanthropic programmes. But at the same time, Samsung is
notorious for its anti-labour union policy and brutal suppression of workers’ rights, and
therefore heavily criticised for having two faces. Another widely-known example is Shell, a pioneer
in triple bottom line reporting and an enthusiastic promoter of the sustainability
report. Despite its CSR propaganda, the 2004 scandal (the company’s overstating of its oil
and gas reserves by 20 per cent) and other activities around its core operations led to the
sharp criticism of NGOs, environmental activists, media and the public, as can be seen on the
“Lessons Not Learned – The Other Shell Report 2004”7.
But recently, there is a noticeable trend which incorporates CSR into the company’s core
business and everyday operations. Qualcomm, the pioneer of 3G services and a leading developer
of CDMA technology, is an outstanding example. It has a long history of
community involvement and philanthropic giving, but has recently reshaped its corporate
citizenship programmes around the idea of technology for development. In 2005, Qualcomm
launched Wireless Reach Initiative, under the slogan “Empowering underserved communities
worldwide through 3G technologies”, by combining its third generation wireless technology with
microfinance and other development programmes in developing countries. It operates programmes
in a large number of countries from China, India and Vietnam to Mexico and
Peru, South Africa and Democratic Republic of the Congo, in partnership with a number of NGOs
including PlaNet Finance and USAID.
Similarly, some of the leading financial institutions are developing their financial products and
services aligned with corporate social responsibility. Citigroup, ABN AMRO, Barclays
and many more commercial banks already launched their own microfinance programmes, hoping to
improve both their social and financial performance; microfinance is expected to provide a new
market opportunity with a huge potential and a unique risk management tool.8
The HBOS group is heavily involved in the development of socially responsible investment,
through its asset management arm ‘Insight Investment’.
6
But again from Friedman’s point of view, it is simply doing something good at the expense of
shareholders.
7
Published by Friends of the Earth et al, available at:
http://www.foe.co.uk/resource/reports/lessons_not_learned.pdf
8
Although the idea of lending loan to low-income borrowers might be considered as a high-risk
proposition, the large number of borrowers and a very small amount of loans to each individual
create a unique diversification effect that help reduce the portfolio risk.
3
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In addition to those efforts to operate the core business in responsible ways, companies are also
trying to bring CSR into all the aspects of everyday operation, from accounting to human resources
and supply chain management. One interesting example is SwedTech AB, a large Swedish
Telecommunications equipment manufacturer which exercised corporate social responsibility in the
context of workforce reduction. In SwedTech, around 10,000 workers
lost their job in 2001 in the face of severe financial crisis, but around 85% of them were transferred
to new solutions under the career change programme named “Forum of the Future 2”.9 This case
suggests that CSR can be embedded in every aspect of business, even in the extreme situation such
as workforce reduction. In this sense, the ultimate goal of a CSR department can be defined as
creating the environment where CSR is embedded across the whole organisation and therefore there
is no need for CSR departments.
All these examples show the organisation-wide and more systematic initiatives of CSR,
rather than one-off, ad-hoc, community-type investment. Although the development of
CORE activities is at its early stage, it should be given enough credit for raising the potential
of CSR beyond a marketing gimmick or a handout.
Socially Responsible Investment: What is the interest of shareholders?
Socially Responsible Investment (SRI) in a broad sense, especially screening certain
companies and/or industries, is not a whole new concept in the modern history of investment.
Since 1970s, there have been a number of screening initiatives against specific firms, from
companies profiting from the Vietnam War to those related to apartheid in South Africa.
Nevertheless, a huge growth of the SRI market, diverse investment strategies beyond
simple screening such as shareholder activism and positive investing, the growing
involvement of traditional financial services and the emergence of socially responsible
mutual funds are all relatively recent phenomena. The European Broad SRI market is now valued at
over €1 trillion10, and SRI assets in the US rose more than 258 percent from $639 billion in 1995 to
$2.29 trillion in 2005.11 Research findings from the Pacific Rim and
emerging markets also present an increasing awareness of, and a growing demand for SRI.12
9
Bergstro, O. and Diedrich, A. Constructing corporate social responsibility: a study of workforce reduction
in a Swedish high-tech company, www.mire-restructuring.eu, 2006
10
European Social Investment Forum, European SRI Study 2006, http://www.eurosif.org
11
(US) Social Investment Forum, 2005 Report on Socially Responsible Investing trends in the United States:
10-year review, January 2006,
http://www.socialinvest.org/areas/research/trends/SRI_Trends_Report_2005.pdf
12
(US) Social Investment Forum, Ibid.
4
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One of the most important assumptions that underlie Milton Friedman’s argument is that
“(shareholders’) desires generally will be to make as much money as possible”13. I regard
SRI as a very important, practical response and challenge to this assumption.
It might be argued that SRI decision is ultimately based on the return on investment
consideration, with the belief that socially responsible companies will be also financially
sustainable and successful in the long run. It is absolutely true that investors value the
potential of responsible corporations, and getting a decent return on investment is an
important motivation factor which distinguishes SRI from donation or other charitable
actions. Nonetheless, SRI cannot be entirely explained by pure financial motives, regarding
that SRI does not always guarantee a higher rate of return, and a large number of investors actually
choose SRI portfolios even if the expected rate of return is slightly lower than other portfolios.
Perhaps it is time to admit the fact that at least some investors actually care CSR
in addition to financial concerns, and the number of these investors is significantly growing
at this moment.
It is important to note that this trend cannot be discussed without mentioning the
emergence of institutional investors. The SRI market is conspicuously dominated and driven
by institutional investments; in most countries, institutional investors account for the absolute
majority of SRI investors.1414
As widely known, the change in shareholder ownership has brought a significant impact on
corporate governance; institutional investors tend to have a longer time horizon for
investments with active engagement, as opposed to the conventional “Wall Street walk” behaviour.
It is known that institutions own 50% of all US equities and over 70% of all UK equities, including
pension funds which account for around one-third in both countries; this change in ownership
explains a great deal about the huge growth in SRI. Furthermore, as
these pension funds and some other institutional funds are by definition hold by the public, it
is even questionable whether shareholders’ interests can be really separable from the interest of the
society.
From a company’s point of view, this trend can bring a new perspective to see CSR as an
opportunity to attract institutional investors. Since many companies are now concerned about
having a positive influence on their investors’ profile, which often means attracting more
institutions and long-term investors rather than speculators and hot money, it is interesting to
observe the link between CSR and the characteristics of investors.
13
Friedman, M. op.cit.
14
In the European market, institutional investments have a 94% market share, which overwhelms the 6%
retail investments. (figure as of 31st December 2005) – European Social Investment Forum,
op.cit.
5
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Conclusion
This paper examined the potential of Corporate Social Responsibility as the core business
of business, by responding two questions from both sides. Is CSR more than a fad or public
relations exercise? And, can it be aligned and reconciled with shareholder value and other
rules of the game in a free market or a free society1515? We discussed two noticeable and relatively
recent trends, CORE activities and Socially Responsible Investment, as practical responses to
criticism from both sides. CORE activities suggest that CSR can be embedded in every aspect of
the operation, especially in relation to its core business activities, beyond a philanthropic giving and
another way of advertisement. SRI pretty clearly shows that CSR
does not necessarily set up a conflict with shareholder value, in the context of institutional
investment in particular.
It is not easy to predict whether these trends will realise the potential of CSR in a much broader
business context. Despite some of the remarkable examples and a huge growth,
CORE activities are still a small part of CSR practices, and the SRI market, especially
positive investing is only a fraction of total investment. Nevertheless, the rapid growth of
CORE activities and SRI, as well as their significant message to the whole CSR debate,
should be given enough attention and examined further in both academic and business community.
References
Bergstro, O. and Diedrich, A. Constructing corporate social responsibility: a study of workforce
reduction in a Swedish high-tech company, www.mire-restructuring.eu, 2006
European Social Investment Forum, European SRI Study 2006,
http://www.eurosif.org/content/download/580/3548/version/1/file/Eurosif_SRIStudy_2006_complete.pdf
Friedman, M. The Social Responsibility of Business is to Increase its Profits, The New York Times
Magazine, 13 September 1970
Friends of the Earth et al, Lessons Not Learned – The Other Shell Report 2004, www.foe.co.uk
Lydenberg, S.D. Corporations and the Public Interest: Guiding the Invisible Hand, Berrett-Koehler,
2005
(US) Social Investment Forum, 2005 Report on Socially Responsible Investing trends in the United
States: 10-year review, January 2006,
http://www.socialinvest.org/areas/research/trends/SRI_Trends_Report_2005.pdf
World Business Council for Sustainable Development, Meeting Changing Expectations –WBCSD’s
first report on Corporate Social Responsibility, 1999
15
What is a free market and what is a free society? What do they exactly mean? This is another whole
important and controversial issue, but not within the scope of this paper and therefore will not be
discussed here.
6
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RUNNER-UP
The Role of Public Policy in Promoting CSR
HITOMI IMAI
Ashridge Business School
http://www.ashridge.org.uk
Ashridge Business School
http://www.ashridge.org.uk
The Role of Public Policy in Promoting CSR
1. Introduction
The social responsibilities of companies vary with the social and economic climate of
the times. Today, in the era of a knowledge-based economy, there is a tendency for
people to require firms not only to meet the minimum legal obligation but also to
contribute further to society. Consequently, the newly-created terms of “Corporate
Social Responsibility” (CSR) and “Sustainable Development” are widely used in both
the private and public sectors. In fact, one after the other, major international
organizations and multi-stakeholder organizations have announced frameworks and
guidelines based on CSR. One such example is the UN Global Compact, which has
established the “Ten Principles,” covering such issues as human rights, labour
standards, environment and anti-corruption. A further example is the “Sustainability
Reporting Guidelines,” published by the Global Reporting Initiative, which help
companies to disclose their sustainability performance and provide stakeholders with a
universally applicable framework to understand such information. The OECD has also
established the “Guidelines for Multinational Enterprise,” which cover such issues as
environment and labour matters, and have been recommended to multinational
organizations by governments. In response to the new developments and concerns it
also revised the “Principles of Corporate Governance” in 2004.
Apart from these multinational organizations, some countries, such as the UK and
France, have even established a new seat in the Cabinet, namely the Minister for CSR.
The UK in particular is taking the leading role in this field: the Pension Act Amendment
in 2004 requires trustees of occupational pension schemes to show their consideration
of social, environmental and ethical issues when selecting investments; and the
Company Act 2006 will require companies to disclose information on environmental,
employee, social and community matters from October 2007.
It should be noted, however, that the above proactive measures of the UK are
exceptional. Most initiatives are not yet binding in international frameworks, and thus
some people argue that the ultimate goal of CSR will never be achieved. Indeed, they
even argue that it is questionable whether the above efforts have been effective in
promoting CSR. Consequently, this essay will consider the new responsibilities of
1
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business and the effectiveness of measures for CSR, and recommend some actions
with respect to the role of public policy in improving the relationship between business
and society.
2. The new responsibilities of business
2.1. When the companies profit maximization becomes socially inefficient?
The Commission of the European Communities (2002) defined CSR as: a concept
whereby companies voluntarily integrate social and environmental concerns in their
business operation and in their interaction with stakeholders. This definition, however,
is somewhat controversial in the sense that companies typically set objectives to
maximize their profits. Indeed, in classical economics and under proper assumptions,
profit maximization is justified, as it can achieve the highest possible satisfaction of any
one consumer without reducing that of other consumers. This argument was
challenged by Friedman (1997), who insisted that “There are two types of situation in
which the simple rule of maximizing profits is socially inefficient: the case in which costs
are not paid for, as in pollution, and the case in which the seller has considerably more
knowledge about his product than the buyer, particularly with regard to safety.”
2.2. Changes brought about by a knowledge-based economy
Nevertheless, today’s knowledge-based economy has diminished the level of
applicability of these two cases. In fact, consumers are now able to find more product
information on the website, which provides them with access not only to official
websites of companies but also to weblogs and web community. As a consequence,
today’s consumers are easily able to learn more from the experience of others, and this
phenomenon may contribute to the lessening of the information divide between buyers
and sellers. Additionally, in today’s sophisticated financial markets, the inappropriate
actions of companies can cause immediate negative reactions from the market.
Indeed, in times of a knowledge-based economy, a significant amount of information is
sent instantly to a wide audience through electronic mail and internet discussion
boards. While companies can make use of the convenience of internet to promote
their activities to investors, there is also the risk that investors are immediately apprised
of their misconduct.
2
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Investors have recently become concerned about the non-financial information of a
company as well as the financial information, and social and environmental matters
also have some implications for the financial markets. This is evident in some recentlycreated schemes, such as socially responsible investment (SRI), environment rating
and CSR reports. These have begun to affect the behaviour of companies, and now
the concept of CSR has been incorporated into company profit maximization. These
new contributions from businesses taking responsibility for economic, social and
environmental impact appear to be in harmony with the strategy of the public sector to
realize sustainable development.
On the other hand, regardless of the changes brought about by the information society
and recent progress in the development of the CSR regime, there is also a risk that “. .
. we have only tantalizing glimpses of the meaningful actions that could be taken
because the markets as they currently stand still don’t send corporate managers strong
enough messages when it comes to questions of long-term wealth and the public
interest” (Lydenberg, 2005). Furthermore, there is also a concern that financial
schemes have not been effectively used. In response to the consultation on the Green
Paper, it was pointed out that: “Investors stressed the need to improve disclosure and
the transparency of companies’ practices, rating agencies’ methodology and
investment management of SRI (socially responsible investment) funds and pension
funds” (Commission of the European Communities, 2002).
3. The effectiveness of measures for CSR
3.1. A handful of companies take measures for CSR
As can be seen from the above, regardless of the continuous efforts made by some
advanced economies, international organizations and leading countries, there have
been some concerns about the effectiveness of the past measures for CSR. In fact,
this argument seems to be fair: “To date, targeted engagements have been effective to
a limited extent and on specific issues with specific companies. They have required
considerable efforts to achieve relatively modest goals. Management can, and still
often does, simply ignore them” (Lydenberg, 2005). While there is a precedent study
that shows a correlation between companies’ proactive CSR measures and higher
stock price and profits, some people argue that this is because those companies are
already profitable enough to take those measures. In other words, it is argued that
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higher stock price and profits enable companies to take measures of CSR. Another
example is that, according to the Tohmatsu Evaluation and Certification Organization,
part of Deloitte Touche Tohmatsu in Japan, there were only 38 companies which were
awarded better than an environmental A rating in 2006. This seems to be a
significantly small number, given that the number of listed companies in Japan
amounted to 2,416 at the end of December 2006.
3.2. The evidence that measures for CSR have been taking effect
On the other hand, it has to be acknowledged that it generally takes a lot of time to
implement changes of this kind in society. While some may believe that the concept of
CSR is still, and will continue to be, a myth, many achievements have come about as a
result of the new CSR measures. One illustration of this is the SRI mechanism. As a
result of the willingness of investors to engage management in non-financial issues, the
valuation of companies is given not only on economical grounds but also for social and
environmental issues. In fact, according to the interim report published by the Ministry
of Economy, Trade and Industry (METI) of Japan, the size of SRI in major financial
areas was reported to be: approximately USD 2 trillion in the US market, EUR 0.28
trillion in the Europe market and about JPY 130 billion in the Japanese market16.
These are palpably not negligible sums, and the METI even predicts that the SRI
mechanism will be further expanded in financial markets. A further illustration is the
dramatic increase in the number of companies that began to adopt measures for CSR
lately. According to the Japanese Ministry of Environment, the number of companies
which published environment reports in 2005 was 570, a 52% increase from 386 in
2001. Consequently, in terms of the number of companies and the size of markets, it is
evident that measures for CSR have been gradually taking effect.
4. Recommendation for further actions
4.1. Why policymakers should take initiatives?
Lydenberg (2005) argued that three mechanisms, namely “targeted engagement,
reallocation of assets and broad public disclosure on corporations and society”, had
produced benefits for society. While he admitted that recent progress had been made,
“With government’s help, each of these mechanisms can be strengthened and
16 The convertible rates are: 1 USD = 120 JPY and 1 EUR = 160 JPY.
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expanded to transform today’s marketplace into one that can act more meaningfully in
these areas.”
There is a clear distinction with respect to CSR measures between Europe and the US:
while European governments have been greatly involved in establishing CSR
measures and have taken the initiative, this tendency is less easily seen in the US. It is
not simple to judge whether or not government-led initiatives are more effective in
improving CSR. It is, however, universally accepted that companies prioritize their
profit maximization rather than social and environmental issues, as they need to
survive against competition. Accordingly, it is understandable that companies allocate
budgets to their business issues first and to social and environmental issues second. If
companies cannot make any profit, they will not be able to afford to spend budgets on
social and environmental issues. On the other hand, governments are not faced with
such restrictions. Indeed, if social, environmental and ethical issues are put into higher
priorities at national level, more budgets will be allocated to the involved parties next
year. Above all, developing the strategy for the sustainable development is one of their
missions. This role is described in the UK government’s CSR website: the Government
has a role in promoting continuous improvement in the business contribution to the
three pillars - economic, social and environmental - of sustainable development.
Furthermore, governments possess strong tools to promote CSR, such as legislation,
regulation and taxation, so they can make a big difference with respect to the further
development of CSR. While these tools seem to be contrary to the idea that the
voluntary nature of CSR should be preserved, this voluntary nature has been an
obstacle to the further promotion of CSR. Only those firms which have a social
conscience emphasize their activities, while others are not taking any action.
Therefore, in order to change the present situation, further action should be expected,
especially from the policymakers, through dialogues between the policyholder and the
private sector.
4.2. Three recommendations for further actions
There are in particular three schemes that I believe will encourage greater corporate
responsibility: the use of rating agencies, the disclosure requirement and education.
First of all, governments should encourage rating agencies to consider CSR activities
when providing ratings. As a result of the transition to the Basel II framework, the role
of the rating agency has been greatly enhanced. Indeed, ratings which are provided by
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private agencies will directly influence risk management of financial institutions under
the Basel II framework. Therefore, if rating agencies consider the CSR activities when
providing ratings, the CSR activities of companies will in turn influence the lending
activities of financial institutions. In other words, the more companies that take
effective measures for CSR, the better the financial conditions they can obtain.
Although it has been pointed out that only profitable companies can afford to consider
CSR, this may provide those companies that have been ignoring CSR activities with
the incentives of taking proactive measures for CSR.
Secondly, governments should consider introducing the new disclosure requirement on
CSR, as can be seen from the UK’s Company Act 2006. People may argue that this
concept will strongly conflict with the voluntary nature of CSR. If, however, one
considers the wide range of the CSR concept, covering people to environment, it
makes it less likely that companies are not taking any action on CSR. Therefore, this
new regulation will give companies opportunities to review what they have done and
strategically consider what they should do through dialogues with stakeholders.
Lastly, governments should introduce an effective educational scheme for CSR. As
can be seen from the trend in the previous paragraph, more and more companies are
now making efforts to fulfil CSR and introduce their actions in CSR reports. The
problem here is, however, that many people outside companies are indifferent to these
actions: the notion of CSR is as yet only indispensable to business life, not to daily life.
Therefore, in order to enhance awareness of CSR, governments should take initiatives
to incorporate education about CSR into ethics classes at school. In order to promote
the voluntary actions of companies, it is essential that stakeholders are able to
understand the challenges of society and possible approaches to improve it. Education
in the early years will enhance children’s awareness and enable them to discuss
constructively social, environmental and ethical issues later on as stakeholders.
5. Conclusion
While there have already been considerable efforts to improve social, environmental
and ethical matters in companies, these will be further enhanced by efforts in the public
sector. Policymakers should consider the use of rating agencies, the new disclosure
requirement on CSR and an effective educational scheme for CSR.
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Bibliography
Basel Committee on Banking Supervision (2004), International Convergence of Capital
Measurement and Capital Standards: a Revised Framework, Basel, Switzerland: BIS.
Commission of the European Communities (2002), Corporate social responsibility: a
business contribution to sustainable development. Brussels: Commission of the
European Communities
Csr. go.uk:
http://www.csr.gov.uk/index.shtml
Friedman, M. (1997), “The Social Responsibility of Business is to increase its Profits”
in: Donaldson, T. & Dunfee, T. (eds.) (1996) Ethics in business and economics.
Dartmouth: Ashgate
Global Reporting Initiative (2007), Reporting framework and guidelines.
Amsterdam: Global Reporting Initiative
GRI Reporting Framework:
http://www.globalreporting.org/ReportingFramework/AboutReportingFrame
work/
GRI Guidelines:
http://www.globalreporting.org/ReportingFramework/G3Online/
Lydenberg, S. (2005), Ch. 6: “The last step: consequences in the marketplace”
in: Corporations and the public interest: guiding the invisible hand. San
Francisco: Berrett Koehler
Ministry of Economy, Trade and Industry (2004): Interim Report on the Study
Group for CSR. Tokyo: METI
http://www.meti.go.jp/policy/economic_industrial/press/0005570/0/040910c
sr.pdf
Ministry of Environment (2005), Results of the 2005 questionnaire on company
behaviour that is good for the environment. Tokyo: Ministry of Environment
http://www.env.go.jp/policy/j-hiroba/kigyo/h17/index.html
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OECD (2000), OECD Guidelines for Multinational Enterprises. Paris: OECD
http://www.oecd.org/dataoecd/56/36/1922428.pdf
OECD (2004), OECD Principles of Corporate Governance. Paris: OECD
http://www.oecd.org/dataoecd/32/18/31557724.pdf
Tohmatsu Evaluation and Certification Organization:
http://www.teco.tohmatsu.co.jp/service/is0221.html
Tokyo Stock Exchange:
http://www.tse.or.jp/english/index.html
United Nations (2007),The Ten Principles. New York: United Nations Global
Compact
http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html
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CSR, A Risky Business – Risk Management and CSR
GLADYS DIFFEY
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CSR, A RISKY BUSINESS RISK MANAGEMENT AND CSR
Introduction – Creative solutions to the World’s problems
Changed drivers of CSR
Changed business case for socially responsible decision making
Risk reporting metrics for CSR
Conclusions
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1
INTRODUCTION – CREATIVE SOLUTIONS TO THE WORLD’S PROBLEMS
Corporate Social Responsibility (“CSR”) is about risk management, and risk
management is about CSR. If we are able to integrate the discipline of risk
management and CSR, the result will be two-fold. CSR will automatically become
more embedded into management processes as it will directly feed into strategic
decision making at all levels of a business. Secondly, it will encourage investment
analysts to recognise and reward CSR.
In this discussion, we investigate the role of CSR and risk management. Responsible
companies have long understood their duty of care towards their employees, but more
recently, they have accepted that the bounds of their responsibility should be extended
to embrace the environment, broader human rights. The failure to do so results in the
risk of reputational damage to companies. 1
In the light of this, socially responsible decision making should take centre stage as
part of the company’s main strategic business planning exercises. The mutual
dependence of corporations and society implies that both business decisions and
social policies must follow the principle of “shared value” - this can be achieved by
strategic CSR. 2
The knowledge economy in Europe has expanded, at the expense of the
manufacturing sector. As part of Lisbon Strategy, European Union’s (EU) has the
stated aim to “make Europe, by 2010, the most competitive and the most dynamic
knowledge based economy in the world” (EU Lisbon Council, May 2000). The EU
defines the knowledge economy by referring to 4 features, which have direct links to
CSR:
• the universal use of electronic exchanges of information – Google’s business
model in China led to their involvement with web censorship, and complicity
in human rights infringements
• convergence towards digital technologies
• the exponential growth of the Internet,
• and the opening up of telecommunications markets – Companies such as
Nokia have expanded market share by selling to the bottom of the pyramid –
for example, based on the author’s own experience, many remote parts of, for
example, Ghana, have available 2nd generation mobile phone technology.
This discussion will focus on the following questions:
How has the knowledge economy influenced and changed the key drivers
1
of CSR?
How has the knowledge economy influenced and changed the business
2
case for socially responsible decision making?
How can risk reporting metrics be developed to report CSR to markets and
3
other key stakeholders?
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2
CHANGED DRIVERS OF CSR
The business case for socially responsible decision making has been described as
requiring CSR to be integrated into the business, by analysing the value chain 2, and
this requires a clear shift from philanthropy to strategic CSR – from responsive CSR
to pro-active CSR.
Company performance should identify, manage and mitigate risks. Companies need
to consider the following as part of their strategic business planning: Equitable
distribution of benefits; Profit and value; Products production and access (for example
in relation to internet gambling).
A model has been proposed to capture the impact of the knowledge economy on
shareholder value in respect of CSR. Operating costs are plotted against external
costs and an efficient technological frontier is identified. Companies that do not
innovate find that a number of drivers including: laws, regulations, NGOs and
stakeholders, move the company along the technological frontier to a point where it
no longer profitable for the company to carry on business. Companies therefore need
to shift the technological frontier through innovations in risk management.
2.1
Bad news travels further and faster - the implications for stakeholders and
values and international law
It is arguable that before, a number of recent corporate scandals would have had less
effect because of limitations on media before the advent of the knowledge economy.
Corporate behaviour has come under the spotlight - this has move business
expectations from ‘trust us’ to the stakeholders demand for ‘prove it’, rooted in
evidence of (a) Infringements of human rights, (b) Complicity and (c) the business
case for reputational management. There are a number of prominent examples: Nokia
and Motorola – forced labour; World Com – business ethics; and Nike – Child
Labour.
The flow of information has also been beneficial in the development of international
law and its enforcement. The increasing power of the media, including the rise of
investigative journalism, has meant that unethical management practices have been
exposed and reputational capital diminished. For example, the BBC’s Panorama
covered use of child labour in the M&S Supply chain (15 October, 2000).
2.2
Change in the type of work- Accountability / risk and values
When discussing change, it is worth stepping back and asking the question – what
really has changed? It is clear that the knowledge economy has speeded increased the
volume and speeded up the exchange of information. This has made access to
information of all types much more readily available.
Over the period 1993 – 2006 UK’s productivity index rose from 82.6 to 105.9 as the
volume of work has increased, in part due to the knowledge economy. 3 This change
in working patterns has changed the risks faced by today’s stakeholders and the
accountability measures required to monitor company’s performance.
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2.3
The need for readily assessable information -Accountability
Business is no longer seen as a neutral participant in the human rights agenda. Instead
there exists a potential for business to be considered complicit in human rights and
ethics infringements that occur within its sphere of influence. Voluntary initiatives
such as the Global Compact (United Nations, 2000a) provide a context for companies
to address these issues – thus reducing the risk of alleged complicity in human rights
infringements.
In order to measure development, indices other than productivity are required. The
human development index (HDI) no longer focuses on purely economic issues; and
the FTSE4good index has been developed. These measures help to improve
transparency of CSR issues. Companies need to be able to predict and credibly
respond to society’s changing awareness of particular issues. 4
Therefore, the change in the speed of work and has created a need for more readily
digestible information formats. Most traditional company level CSR reporting has
taken the form of lengthy reports. The award winning De Beers 2005/06 CSR report,
‘Living up to diamonds’, adopts a structured format with analysis presented under
headings such as Economic, Ethics, Employees, Communities and Environment. 5
The share price of De Beers did not respond to the release of the De Beers 2005/06
CSR report. There is a perception that mainstream investors do not reward CSR. To
a large extent CSR considerations are not top of the agenda of mainstream investors.
It is important to find ways of articulating CSR work to investors and shareholders in
a format that they will be able to readily use in valuation work.
2.4
Are we sure that the market doesn’t value CSR?
Do markets value risk? (risk and opportunity)
The knowledge economy has the effect of increasing the volume of information
available to investors and equity analysts. It has commonly thought that equity
markets doesn’t value CSR, but that markets do penalise companies when something
goes wrong, as a result of having poor CSR policies.
However, we should instead ask ourselves the following question. Do markets value
risk? In Financial theory, the capital asset pricing model (CAPM) is commonly used,
this model presumes that all investors can hold a diverse portfolio of investments
through owning stocks and bonds. When considering the risk of a particular
investment, the critical issue is how the addition of that investment will impact the
risk of the entire portfolio. Risk is central to the value placed on investments. 6
A consequence of the knowledge economy has been to make risk management
information more readily available to investors – for example Prudential Plc’s
Economic Capital Analyst presentation, which includes a treatment of operational
risk.7 In certain sectors, for example, insurance and banking such risk management
reporting information is common place. This format of information should be
extended to CSR reporting.
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3
CHANGED BUSINESS CASE FOR SOCIALLY RESPONSIBLE DECISION MAKING
The knowledge economy has changed the business case for socially responsible
decision making by moving the argument from being about public relations and
compliance towards one of doing ‘positive good’.
It can be argued that this shift would not have occurred without the knowledge
economy bringing information into the hands of stakeholders. Case studies prove that
the best examples of corporate CSR have been birthed through the fires of crisis.
Many companies have been forced through crisis to change by adopting the following
new approaches: partnership, rights and responsibilities, social reporting, indicators
and performance indicators, reconsider financial drivers, strategic business planning
and development rights.
The UK Insurance Industry has taken note of this trend. In a recent report, the
Association of British Insurers (the ABI) stated that, “On the whole, mainstream
equity analysts have shown relatively little interest in corporate responsibility. They
have tended to regard the issues as having little relevance to earnings forecasts and
shareholder value – in the timescale which mainly concerns them …. This situation
has changed, slowly, since the mid- 1990s when corporate responsibility began to
grow. One in three sell-side analysts now say they believe social and environmental
issues are important in evaluating companies. Some firms have taken specific steps.
For example, UBS has contracted the CR specialist firm Innovest to train staff on
environmental issues. HSBC and Dresdner Kleinwort Wasserstein have employed
specialist staff to stimulate awareness and understanding of corporate responsibility
among their equity specialists and clients. And in some sectors which will be
significantly affected by current developments, analysts have begun to take social and
environmental issues into account in their analysis, e.g. utilities, where several
analysts 28 have published reports on the impacts of climate change and the
European Union’s emissions trading scheme.” 8
4
RISK REPORTING METRICS FOR CSR
Having addressed the impact of the knowledge economy on the business case for CSR
and socially responsible decision making, in this discussion, we are going to focus on
how can we give companies the framework / tools to clearly articulate the business
case for their company in a way that is meaningful for investors.
CSR practictioners should adopt the techniques used by risk managers. They need to
take a step by step approach to analysing the problems faced by companies, in order
to demonstrate the value to business of CSR.
A top down approach to developing CSR risk management frameworks has been
used. Under this model international laws, the international declaration of human
rights, national laws and regulation are used a driver for risk management, as
companies need to comply with these laws. A bottom up approach is proposed where
the starting point for the analysis is the engagement of stakeholders.
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In this discussion, we propose an alternative bottom up approach under which risks
are analysed in order to develop adverse scenarios which are faced by companies.
The process follows step by step process for analysing the risk facing companies in
order to develop CSR policies. The analysis should not just be focused on the
company’s risks, but should also cover the risks to the society
The EU’s Basel II framework introduced a standard industry approach for operational
risk in financial services companies - this framework can be extended to cover CSR.
Companies face three key challenges: risk management, risk measurement and
embedding risk management in their businesses. Techniques of bottom up stress and
scenario testing are used throughout the World in Financial Services. For example,
the Bank of Japan (BoJ) regularly carries out analysis to assess its exposure to the
following risks, Earthquake; Fraud; Lawsuit; Contract checks; System problem;
Business continuity plans and Labour-related problems. At BoJ the Risk Analysis
Department already carry out CSR by a different name. 9
The bottom up framework as applied in the financial services industry is outlined
below, this model is applied to the De Beers Case study in Appendix 1.
Risk identification
Develop plausible adverse scenarios for
each material risk and consider
Identify risks which the
company is exposed to. Risk
management information is
often readily available in the
form of risk registers, regular
Management Information
(“MI”) reports and
governance related
documentation.
Severity of scenarios considered. It is
important to ensure that the scenarios
considered are sufficiently adverse as to
require the development of risk mitigation
strategies.
Develop key risk indicators
(KRIs), key control indicators
(KCI) and key performance
indicators (KPIs) for
companies to report risk
management performance.
This could include developing
risk reporting “dashboards” and
reporting tools to graphically
present risk management
information.
Granularity of scenarios: It is important to
demonstrate that a robust bottom up
approach has been used. Companies need
to document detailed working to support
their choice of operational risk scenarios.
Regular reporting format need to
developed. These should be
brief presentations targeted at
investors and equity analysts
summarising:
Risk mitigation: Develop mitigation
strategies for each scenario or identify how
much capital company needs to hold against
each scenario.
Key risks
Key adverse scenarios
Key mitigation strategies
KRIs, KCIs and KPIs
What has changed: Progress in
risk management since the last
report
Immaterial risk should been
screened out. The risks
should be reviewed to see if
any significant risks have
been excluded.
Map risks identified to
external benchmarks and
other risk classifications.
Companies need to
demonstrate awareness of key
industry risks, and how much
(reputational) capital can be
saved.
Consider diversification effects – i.e.
company gets a benefit from the fact that all
the adverse scenarios are not expected to
occur at the same time.
Companies need to have
robust identification and
completeness review
procedures, and these need to
be documented.
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5
CONCLUSIONS
In this discussion, a bottom up risk analysis approach has been outlined which can be
used to link CSR to broader risk management. The bottom up approach can be used
to propose KRIs and KCIs for monitoring and reporting risk management. These
could be used to develop risk reporting ‘dashboards’ which could be used by equity
analysts and other stakeholders.
Good high quality KRI and KCI information could be used as the basis for the
development of CSR information could give the market positive signals regarding a
company’s risk management. This information if regular and digestible, then over a
period of time, markets could give a positive value to CSR.
In the knowledge economy, the business case for CSR can be found in risk
management. However, 49% of top European business managers believe that the
purpose of CSR initiatives is mainly about image. 10 Clearly work is needed to win
hearts and minds of senior management. The use of existing business risk
management frameworks can help provide a clear way to embed CSR in the
management of business, shareholder value and communication with key
stakeholders.
6
REFERENCES
1.
Human Rights – Is it any of your business? (2000), Amnesty International.
2.
Porter, Michael E., Kramer, Mark R (2006), Strategy & Society: The Link
Between Competitive Advantage and Corporate Social Responsibility, Harvard
Business Review.
3.
UK Productivity – whole economy statistical series, Office of National
Statistics, www.statistics.gov.uk.
4.
Zadek, Simon (2004), The Path to Corporate Responsibility, Harvard Business
Review.
5.
Living up to Diamonds (2006), De Beers Group, www.debeersgroup.com.
6.
Brealey, Richard and Myers, Stuart (2002), Principles of Corporate Finance
(7th edition), Chapters 7 and 8, McGraw Hill Higher Education.
7.
Economic Capital and Financial Reporting (2005), Prudential Plc,
http://www.prudential.co.uk/.
8.
Risk, Returns and Responsibility (2004), Association of British Insurers.
9.
Key points of Scenario Analysis (2006), Bank of Japan,
www.boj.or.jp/en/type/release/zuiji_new/data/fsc0608be2.pdf.
10.
European Business Monitor Survey (2007), UPS, Briefing March 2007.
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APPENDIX 1
Background: dealing with Aids in Botswana 7
Risk
identification(A)
• Data security
• Carbon
footprint
• Child labour
• Forced labour
• Working hours
• Health and
safety
• Freedom of
association and
collective
bargaining
• Discrimination
• Discipline
• Remuneration
• Human rights
• Environment
• Ethics / anticorruption
• Economics
(A)
Materiality
screening
Exclude the
following as not
issues in this
specific case:
Child labour
Data security
Discrimination
Discipline
Working hours
Human rights
Scenario development
Mitigation strategies
• Health and safety – risk of
workforce contracting HIV
/AIDS, with consequent
productivity issues
• Environment – failure of
water management policy
• Carbon footprint – product air
freighted – climate change
levies
• Child labour / Forced labour bad publicity and
infringement of
national/international laws
• Freedom of association and
collective bargaining – bad
publicity
• Remuneration – underpaid
workers – bad publicity, bad
staff retention, poor
productivity
• Economic – need to support
economies of diamond
mining countries where De
Beers active
• Health and safety: Provide the following to work force, families
and communities:
o HIV treatment
o Health education
o Healthcare
o Introduce target of zero fatalities
• Child Labour/ Forced Labour:
o Monitor mining operations to ensure / control no
forced labour or child labour. Document efforts.
• Remuneration:
o Increase base pay – minimum wage
o Flexible working
o Other benefits – e.g. education / health care
o Can lead to positive publicity
• Water management strategy – during droughts – emergency
relief programs; donation to Government funds for
drought relief. Look at alternative water sources. Use
water consumption targets.
• Ethics / anti-corruption – All diamond ‘sightholders’ required to
subscribe to best practice Principles.
• Economics: Make sure that local taxes are paid. Support local
entrepreneurs. build infrastructure, supporting local
suppliers – e.g. of ferrosilicon.
Generic risk identification indicators should be used for each industry
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Competitive or Responsible: Resolving the Dilemma
KAUSHALENDRA
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COMPETITIVE OR RESPONSIBLE – RESOLVING THE DILEMMA
Introduction
st
The 21 century Challenge
Prerequisites for success
Competitive Responsibility: Means to achieve
Conclusion: A Paradigm shift
References
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Introduction
The changing role of business in society and its growing responsibilities is certainly not a
new topic for debate; it is becoming popular because business, society and government
are becoming increasingly entwined in their actions. Businesses tend to use public goods
which are meant for everyone with the result that it decays faster and the onus of its
maintenance falls only on the governments for inexplicable reasons. A few weeks ago,
we underwent a simulation, in which there were eight teams/factories, each drawing
water out of a common lake for commercial purposes. These teams had the option of
either treating the water before they release it back into the lake or leave it untreated. If
more participants leave it untreated, the impurities would rise and over time the lake
would be rendered unusable resulting in the closure of factories surrounding it. At the
end of every season, each firm would have some profits (apparently a measure of
success) and the aim was to maximize profit. Thanks to the Prisoner’s Dilemma coupled
with the Free Rider problem, the lake got polluted soon and not surprisingly the most
profitable factory was the one that was least socially responsible i.e. which left the water
untreated the maximum number of times. As appalling as it may sound, this is what
most of us are conditioned to do. Maximize profits at any cost. I would touch upon this
point again in the conclusion, but for now, will try to convince the readers being
competitive and socially responsible both is a reality and companies like Intel and BP are
already doing it. Before we take a plunge, let us define the term ‘Responsible
Competitiveness’? In simple terms it means ‘the ability to create and maximize value of
a business while remaining socially responsible’. This essay seeks to explore the
emerging role of ‘Responsible Competitiveness’ in a knowledge economy, outlines the
pre-requisites and finally offers suggestions to the business and governments to fulfil
this responsibility.
The 21st Century Challenge
The responsibilities of business have not changed drastically since the last century
though their priorities might have. More importantly, their method of implementation
has changed since it now involves the use of Information and Communication
Technologies. Being socially responsible today, needs to make business sense and
contribute to bottom line. Thus, “the challenge and vision of Responsible
Competitiveness is to embed social and environmental goals and outcomes in the very
heart of competitiveness”.1 Whether being socially responsible pays has always been a
matter of debate. So AccountAbility (an organisation piloting research in this field) and
the Copenhagen Centre have formulated a way to measure Responsible competitiveness
called the ‘Responsible Competitiveness index’ (RCI) by using the ‘National Corporate
responsibility Index’ (NCRI) along with WEF’s Growth Competitiveness Index. It is
interesting to note that the Nordic countries (Denmark, Sweden, Finland and Norway)
rank amongst the top 5 in the RCI 2005, NCRI 2005 as well as the Knowledge Economy
Index, which is calculated by the World Bank (based on the 4 pillars of a Knowledge
Economy). Responsible Competitiveness, through research, is thus shown to be
compatible with growth and success in a knowledge economy.
Prerequisites for success
Before we proceed to analyze how organizations can achieve competitive responsibility,
it is important to dwell on certain important pre-requisites to facilitate this transition.
1
Simon Zadek, Peter Raynard and Cristiano Oliveira
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Macroeconomic stability can be of essence to create an environment for fair and
responsible competition. A country open to trade offers a better shield from currency
crashes or funding cut-offs. Openness to trade implies a high trade/GDP ratio and
therefore investors are less likely to pull out because such a country is less likely to
default. This would also encourage the flow of the Foreign Direct Investments (FDI)
because investors feel safer in an open trade environment. In such an environment it is
easy to move capital across borders. Macroeconomic stability also includes a sound
judicial system which should be independent to be able to deliver fair verdicts in
conflictual situations. Besides an improved infrastructure, a stable environment allows
free movement of labour, and is backed by sound monetary and fiscal policies. In a
nutshell, a stable political and economic environment is ideal for the growth of
responsible competition.
Clearly R&D is one of the dominant approaches to trigger growth in the knowledge
economy. To encourage innovation, therefore, a strong system of Intellectual Property
Right (IPR) is vital especially in the pharmaceutical and the biotechnology industry.
These IPR laws create an incentive for entry of new firms, development of
entrepreneurial ventures and consequently free flow of venture capital across industries.
Moreover, smaller players are aware that are mechanisms by which they can be
protected from being wolfed down by stronger competitors. Nevertheless, nondiscretionary use of IPR laws across other industries can also restrict innovation by
creating short term monopolies (or, irresponsible competition), a condition contrary to
free markets and hence, detrimental to growth.
Last, good education system is the foundation of a sustainable knowledge economy. An
education system should include practices which not only have a bearing on attitude but
also ethical competitiveness. Consider the recent case of a reputed business school
where some students were caught for cheating and subsequently expelled or suspended.
These students, deemed to be future business leaders, are not fresh graduates but
experienced professionals. What could be so tempting that they resorted to cheating?
Some people call it lack of control mechanism, others call it circumstances but I think it
was simple greed. As a business school student myself, I can’t think of any other reason
to cheat. In schools students cheat for grades, in office the same professionals
manipulate for a promotion or a pay hike. When the entire MBA curriculum emphasizes
on a long term outlook, a sustainable business strategy and value creation, why then, do
students indulge in such acts for short term gains. The idea of resorting to unethical
means when everyone else is doing so, does not indicate weak individuals, but either a
weak education system in which they were groomed, or the practices prevalent in
‘dream’ companies which tend to weigh grades higher than the actual learning. A good
education system is hence a fundamental requisite because a company is as
competitively responsible as its employees.
Competitive Responsibility: Means to achieve
One of the key pillars of a knowledge economy, as defined by the World Bank is “an
educated and skilled labor force that continuously upgrades and adapts skills to
efficiently create and use knowledge”. Private organizations can contribute towards this
effort by playing an active role in the optimal use of labour through education, skill
advancements, social inclusion, and life long learning. For example, Korea, despite dire
initial conditions, experienced rapid and sustained economic growth since the 1960s,
resulting in GDP per capita increasing more than eleven-fold. One of the reasons for this
growth has been the Government’s priority on education. The Korean government
convinced the private sector to contribute significantly to the total education costs,
thereby increasing education levels, both in terms of coverage and quality. Another such
example of an organization, which is contributing towards education while achieving its
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business objectives, is Microsoft. Microsoft has announced that it will supply cheap
Microsoft software to governments of developing countries, which provide free
computers to schoolchildren. The company has said that this initiative has two benefits –
it meets its goal of doubling computer users to 2 billion by 2015 and combats piracy in
developing countries.
Commitment to a labour strategy resulting in skill enhancement of unskilled labour
creates a unique level of skilled workforce in an economy. In the Danish growth model,
unskilled workers attend evening classes at vocational schools to be able to compete for
skilled jobs. The Danish labour market today is one of the world’s best and is a crucial
factor in Denmark’s opportunities for growth and employment. Cisco’s Networking
Academy program is another effort in this direction. It is a partnership between Cisco,
educational organizations, business, and government and community organizations
around the world, aimed at nurturing IT professionals. Globally more than 2 million
students have graduated from a total of approximately 10,000 Academy centers in more
than 165 countries.2
Further, social inclusion especially in terms of allowing workers who so wish to work
longer has clear advantages for business. Lifelong learning is an important cultural and
economic asset.3 As per OECD research, companies pay older workers more as they are
worth more. IBM set up a separate company called Skill Team, which re-employed any
of the early retired who wanted to go on working up to the age of 60. The company
offered services to IBM, thus allowing it to retain access to some of the intellectual
capital it would otherwise have lost. Mc Donald too is launching an ad campaign to
propagate the benefits of “Mc Jobs” for older people. This is being done as a pre-emptive
effort to avert any criticism (that the organization only employs younger people) due to
the new age discrimination legislation that is going to be introduced in UK.
Besides investment in an educated and skilled workforce, investment in R&D is another
important area for organizations to contribute in a socially responsible manner. The
second pillar in the KE framework is “an effective innovation system of firms, research
centers, universities, consultants, and other organizations that keep up with the
knowledge revolution, taps into the growing stock of global knowledge, and assimilates
and adapts new knowledge to local needs.” In the 1970s, Finland (Ranked No. 1 in RCI
2005) was a resource intensive industry whereas today it is one of the most ICT
specialized economies in the world, with a high Knowledge Economy Index. One of the
leading factors for this growth is investment in R & D. In Finland, R& D have been
privately funded to a large extent. In 2003, Nokia accounted for 25 percent of Finland’s
total R&D expenditures, 3.7 percent of GDP, and 20 percent of total exports. Meanwhile,
Nokia has also grown into a world leader in global communications. Another example in
this area is that of Citibank. It is launching a series of biometric ATMs in India for the
illiterate slum dwellers, to increase its customer base by including the “unbanked poor”.
The machines will recognize account holders' thumbprints, eliminating the need for a
personal identification number, and will have colour-coded screen instructions and
voiceovers to guide them through transactions.4
2
http://newsroom.cisco.com/dlls/2007/prod_062007b.html
3
http://www.un.org/ageing/prkit/decentjobs.htm
4
http://www.ft.com
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The third pillar of a knowledge economy is a dynamic information infrastructure ranging
to facilitate the effective communication, dissemination and processing of information.
The Estonian Telephone corporation which collaborated with the Estonian government
(Estonia is ranked 16th in RCI 2005, 10th in NCRI 2005) to provide one of the most
modern telecommunication networks along with low connectivity costs in Europe. The
company entered into a concession agreement and helped to ensure connectivity in rural
and scarcely populated areas, in return for lucrative urban contracts. So deep is the
Estonian government’s commitment to this effort that the Estonian parliament voted to
guarantee Net access, just like any other right, to its citizens.
A fourth significant area is social welfare. In Europe by 2020, 25% of the EU’s population
will be over 65, and by 2050 spending on health and long-term care is expected to triple.
E-Health initiatives can thus, contribute to increased efficiency and productivity gains.
eEurope 2002 and 2005 initiatives, along with the Aho Report have paid special attention
on how organizations can contribute towards this issue. In Germany, nearly 2000
patients with chronic heart problems and 200 with diabetes are being monitored through
a Telemedicine system at home. This technology results in better care as well as cost
reductions for the hospitals and insurance companies. Meanwhile, Carestream and
Hitachi Data Systems are collaborating to build a data management system that will
efficiently archive clinical information from multiple systems over extended period of
time and will available in July 2007 to healthcare organization. This new systems will be
able to handle multiple data types including patient records and diagnostic images.
It has been observed that, often responsible competitiveness arises out of imposed
regulations and international standards yet it succeeds in benefiting organizations in the
long term, even though initial implementation costs may seem high. The SME producers
of fresh fruits in Chile realized that to compete in a global market, they had to be
certified as per International standards. They developed a Chile GAP standard that
corresponded to these markets and focused on environmental, hygiene and
phytosanitary issues along with safety for employees. Implementation of these standards
has resulted in increased productivity, safe goods for customer as well as broader access
for Chilean companies. Similarly wine manufacturers in South Africa have decided to
follow a code which ensures better treatment of employees in an industry which was
known earlier for their poor treatment. By investing in human capital, these wine
manufacturers hope that employees will gain a better understanding of wine production
which will, in turn improve productivity.
Providing a clean environment to the citizens of the world can also prove beneficial to
organizations. Research shows that Electric utility companies with above-average
environmental management earned 30% greater shareholder returns over three years
than below-average companies. Similarly, ForestRe, a large re-insurer in the timber
business and a carbon and green commodities trading company has an innovative $300
million venture with the Panama Canal. The company plants and sells timber around the
canal, sells the clean water in the canal, and sells the carbon credits that it earns
through timber plantation thus making a profit out of the canal while preserving the
environment as well.55 Pepsi-Cola Co. too conserved 196 million pounds of cardboard
and saved $44 million by switching from disposable corrugated-cardboard shipping
containers to reusable one. 6
5
http://corporateresponsibility.blogs.ie.edu/archives/2007/05/ecosystems_as_p.php
6
http://coopamerica.org/
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It is also critical that organizations indulge in fair trade practices since small enterprises
and independent start-ups - which are essential for the knowledge economy - are
particularly vulnerable to predatory behavior by large firms. A recent example of Fair
trade is Sainsbury's announcement that all the bananas that it sells will be fairly traded,
and that nearly 100m of these will come from St Lucia. As a result, farmers are now able
to invest in their community in the form of school equipment, farm roads and community
facilities. Competition for the ethical pound has reaped dividends for fairer trade. The
Fairtrade Foundation announced that sales rose by 46% in 2006 in £290m and should
easily top £300m in 2007, thus proving beneficial in economic terms as well.77
Finally, Responsible Competitiveness can attain its true potential through Corporate
Responsibility Clusters amongst the business community, labour organizations, wider
civil society, universities and the public sector. Some good examples are available from
the Danish economy. In Denmark, there is a growing need of accommodation for the
growing aged and disabled population. The Danish innovation council is working with
consulting firms, manufacturer’s of special building products for the disabled,
researchers and the public sector to become a leader in this field. This is particularly
significant given Europe’s trend of declining birth rates and rising life expectancies.
Conclusion: A Paradigm shift
In view of the above and the business simulation described in the introduction, an
important lesson learnt is that if all the players had co-operated to keep the lake clean,
they could have co-existed longer with much higher individual profits compared to that
of the best player. Thus, being responsible can be indisputably more profitable because
we act in harmony with our environment. What is indeed lacking today is the will to
embrace the new means. Many would also argue that the prisoner’s dilemma would
always undermine the efforts of others. Surely it may undermine but this cannot be
changed. Only a few are intrinsically motivated and self-disciplined. For the rest, we
ought to change the consequences of the not being socially responsible. The penalties
served today, for not being socially responsible, do not compensate for the damage
done. The situation calls for re-regulation, stricter control mechanisms, empowerment of
local authorities to enforce these regulations. It is imperative that businesses seek
assistance from the government to regulate and later, possibly self-regulate. The
implementation as well as the enforcement of the means to achieve Responsible
Competitiveness discussed in the essay above, therefore, becomes critical. Equipped
with these options, while nations and organizations are moving towards the tripartite UN
Millennium Development goals, they must remember that actions taken must leverage
the cultural uniqueness of the nation or region. The real paradigm shift for business and
society in the knowledge economy thus, lies not in the choice of objectives, but in the
choice of the responsible ways of achieving those objectives. As Michael Porter said,
“Competitive strategy is about being different. It means deliberately choosing a different
set of activities to deliver a unique mix of value.”
7
http://environment.guardian.co.uk/food/story/0,,2021475,00.html#article_continue
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References:
Business and its Environment; David P Baron (5th Edition)
Finland as a knowledge economy; Edited by Carl J. Dahlman, Jorma Routti and
Pekka Ylä-Anttila
Korea as a knowledge economy; Prepared by the World Bank
Responsible Competitiveness - Reshaping Global Markets Through Responsible
Business Practices; Simon Zadek, Peter Raynard and Cristiano Oliveira
Europe and Central Asia region - Environmentally and socially sustainable
development-A preliminary strategy to develop a knowledge economy in
European union accession countries; Prepared by Kevin Cleaver
The Danish Strategy - Denmark’s opportunities in the global knowledge society;
Jørgen Mads Clausen
Corporate Responsibility a Driver of European Competitiveness; Report Finds by
AccountAbility and EABIS
http://www.wbcsd.org/plugins/DocSearch/details.asp?type=DocDet&ObjectId=M
Tc2OTU)
http://environment.guardian.co.uk/food/story/0,,2021475,00.html#article_contin
ue)
http://corporateresponsibility.blogs.ie.edu/archives/2007/05/ecosystems_as_p.p
hp
http://www.achr.com.au
http://coopamerica.org/
http://europa.eu.int/invest-in-research/
http://intranet.csreurope.org/news/
http://www.ehealtheurope.net/news/telemedicine_growing_in_use_in_germany
http://www.sdnp.undp.org/it4dev/stories/estonia.html
http://www.ethicalcorp.com/content.asp?ContentID=4433
http://www.trendchart.org/scoreboards/scoreboard2005/summary_innovation_inde
x.cfm
http://ksghome.harvard.edu/~jfrankel/Does_Openness.pdf
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In Anticipation and in Actualisation
A discussion on the responsibilities of business in the formative
and stabilising phase of knowledge economy
SEE HUA NG
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The Responsibilities of Business in a Knowledge Economy: In Anticipation and In
Actualisation
In Anticipation and In Actualisation
A discussion on the responsibilities of business in the
formative and stabilising phase of knowledge economy
Introduction
Business’s Role and Responsibility
The Knowledge Economy
The Formative Phase
The Impact of Transition: Displacement of Work
The Scale of Impact
Business Responsibility: Sensitivity in Change
The Stabilising Phase
The Social Network
Implicit Paradigm Shift
Business Responsibility: Creating a Resilient
Workforce
Conclusion
Reference
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The Responsibilities of Business in a Knowledge Economy: In Anticipation and In
Actualisation
INTRODUCTION
This paper attempts to discuss the responsibility of business in two
important phases of the knowledge economy – formative and
stabilising. This discussion first establishes that business is
responsible towards society before moving on to form a basis for
the discussion by establishing what constitute a knowledge
economy. This is followed by an analysis of the social impacts
during these phases and what this means to business interest and
responsibility.
BUSINESS’S
The market, government and religion are all constructs that form
ROLE AND
part of our reality and society. Each construct has its own
RESPONSIBILITY
functionality and purpose; and the purpose of the market can be
summarily put down to the management of properties, labour and
capital flow. Turning further inward, the micro-workings of these
market functions are in turn performed by businesses and other
social organisms. However, in the process of managing these
scarce resources to generate wealth, businesses generate both
positive and negative externalities; where externalities are impacts
organisations exert on the society but which lay beyond their
normal functions or intentions. Take the film industry for example.
The industry may produce great epics but at the same time takes a
toll on the society’s impressionable youth by depicting violence as
socially acceptable. This social cost is a negative externality of
films which are liberal towards the use of violence. Or the Bologna
Declaration for example. The intention of the declaration is to
reform Europe’s educational system. However, as a result of this
reform, societies across Europe will experience an increase in
labour mobility. For a well developed economy, this might translate
to an increase in local competition which is a negative externality
for its young graduating workforce. On the other hand, for a
relatively under developed economy, this might translate to more or
better work opportunities which is a positive externality for its
workforce. As demonstrated, defining positive and negative
externalities could be complex since this essentially is subjective to
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stakeholder interests. The balancing of externalities can either be
maintained through social institutions or through business’s self
regulation. In addition, this generation of negative externalities
creates a link between business and society which ultimately
results in business’s responsibility towards societies.
In essence, (1) businesses generate externalities and therefore (2)
have a normative responsibility towards society and its constituting
stakeholders.
THE
The knowledge economy is oftentimes described as the New
KNOWLEDGE
Economy. What is a knowledge economy and what is new or
ECONOMY
different between knowledge economy and market economy? A
knowledge economy is one in which the generation and exploitation
of knowledge play a major role in the creation of wealth in the
economy1. The difference between knowledge and market
economy is then the addition of knowledge as a production factor,
besides labour and capital flows. But knowledge is not akin to its
scarce predecessors. The key differences are (1) once knowledge
is in the public domain, the marginal cost of knowledge duplication
is relatively low or negligible and (2) knowledge sharing tends to
create a virtuous cycle where new knowledge is constantly
generated on top of the existing knowledge platform. This
knowledge sharing phenomena is essentially the underlying current
that has been sweeping through the Silicon Valley, where new
knowledge and ideas, and therefore wealth, are constantly
generated and accumulated in the local social network2 (the idea of
social network will be further described in later paragraphs).
1
Ministry of Economic Development, Manatu Ohanga (1999) What Is the Knowledge Economy
2
Emilio, J. Castilla, Hokyu, Hwang, Ellen, Granovetter, and Mark, Granovetter Social Networks in Silicon
Valley
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Although knowledge economy is often associated with the
information and communications industry (ICT), ICT is more often
the facilitator of the new economy in its quest for knowledge by
building up an efficient knowledge sharing platform. Knowledge
economies can range from fashion design and brand management
in Milan to financial centres in London and to technological
research and development in Dublin. The type of knowledge each
industry is involved in varies from consumer and cultural to financial
and further to technological. In addition, the term knowledge worker
has been coined to represent this changing economic landscape in
terms of work type. In a knowledge-based economy, work is
transferred from transformational and transactional to informational
and tacit.
Additionally, knowledge can be acquired through: (1) structured
knowledge gained through formal education and training; and (2)
tacit knowledge gained through experience and social interaction.
In essence, the knowledge economy touches on many industries
and ICT plays an important supportive role as a facilitator of
knowledge transfer.
THE IMPACT OF
Knowledge is not by any means a new concept and neither is
TRANSITION:
knowledge economy a revolutionary being. What is new is the pace
DISPLACEMENT
of shift from market economy to knowledge economy. The actual
OF WORK
impact of this shift, though, is complex and is often compounded
with
another
phenomena
–
globalization.
Separating
the
phenomenon of market to knowledge economy and that of
globalization is difficult since they both share the same evolution
driver – that of an improved communications and informational
flow. But both have essentially the same impact on society –
displacement of existing transformational and transactional work
with tacit work. For example, when the tailors in Italy moved up the
value chain and focused more on brand creation and fashion
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designs, actual manual tailoring was outsourced to other regions or
countries. The workers involved in the transformational work of
dyeing and cutting and sewing are replaced with workers involved
in brand management and fashion designs. The two work types are
inherently different and the dyers, cutters and sewers are
displaced. In terms of externalities, the strategic shift of these
fashion houses created a negative externality for the displaced
workers. Even in this simplified scenario, there are two distinct
organised interests – that of the displaced union workers and local
politics, whose interests may be in conflict with the market strategy.
It is therefore a responsibility of business, as much as in its interest,
to balance its economic goals and the resulting negative
externalities against the interests of the affected stakeholders. An
oversight in this regard can potentially immobilise the organisation
in public conflict and produce detrimental fiscal results as well as
long term damage to its reputation.
THE SCALE OF
As
a
result
of
transitioning
from
market
to
knowledge,
IMPACT
marginalisation of part of the society that does not have or is not
able to acquire the right skill is bound to occur. Marginalisation can
be expected both as a result of permanent structural change as
well as labour inflexibility. As the pace of change accelerates, more
of the existing society may be marginalised as compared to when
the change is localised or when it is more gradual. This highlights
an additional dimension of magnitude. Reverting back to the
fashion houses, if all the fashion houses close their plants at about
the same time, labour demand will decrease significantly which will
in turn depress wages. Regulations that prevent or delay job losses
dampen incentives to increase labour flexibility and reduce rents for
the affected industry and therefore potentially create inefficiencies.
As global competition creates an increasing urgency for many
members in the European Union to transit to a knowledge
economy, the pace of change inevitably hastens and the magnitude
of the negative externality inevitably increases. This will result in an
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increased focus on business’s responsible management of their
social cost. This is not a trivial issue. When social pressure
increases due to job losses, these pressures manifest through
protectionist regulations. The phrase “where competition is free and
undistorted” has just been dropped from the draft EU treaty with
potentially
far
reaching
implications
for
local
and
foreign
businesses. This protectionist inclination is a reaction to global and
local economical changes and this protectionist climate will impact
businesses and their competitive advantage. It is therefore in
business’s interest to be responsible and sensitive to social issues,
particularly in a time of jarring change.
BUSINESS
Business has a responsibility to be sensitive. Business does not
RESPONSIBILITY: only manage an economical bottom-line but also a social bottomSENSITIVITY IN
line. Incidentally, the management of its social bottom-line
CHANGE
becomes increasingly complex in a world where business goes
global and culture remains very much local. If it is difficult for the
management team in London to anticipate labour and political
reactions in Dublin towards its market strategy, the situation would
be much worse for a team in Seattle, Washington, trying to
anticipate reactions in Peking or Madrid towards its market
strategy. Cross cultural management is never simple. A seemingly
culturally mismatched Asian might fare better in managing cultural
differences in Madrid than a geographically closer Londoner.
Therefore, the first step towards developing sensitivity is to drop
stereotypical assumptions. Only without stereotypical baggage can
business arrive to a realistic understanding of stakeholder interests.
This applies not only to cross cultural issues. The second step is to
analyse internal stakeholders, arrive at an understanding of their
interests and be sympathetic towards addressing those interests. It
is possible that organisations offer reasonable terms only to have
them rejected by stakeholders because the terms do not address
their underlying interests. More importantly, not only does business
needs to understand stakeholder interests, it also needs to
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prioritise internal communications and through which show concern
and empathy and thereby keep a human front throughout the
period of change. The third step is then to analyse external
stakeholders and public communications tools so as to plan and
manage external public relations.
Business sensitivity in times of change does not reduce the
disruption caused by the change. But business has a responsibility
to be sensitive and responsive to the social needs caused by the
change. This reduces the social costs of change and helps
business in avoiding conflict with organised interests which may be
costly and time consuming.
THE SOCIAL
In a knowledge economy, social network forms an informal platform
NETWORK
where
knowledge
is
transferred
between
businesses.
The
importance of such platform can be inferred from various
successful knowledge economies such as the financial centre of
London, the technological centre of Dublin and the innovation
centre of the Silicon Valley. Each of these economies is highly
successful because the existing network of tacit knowledge forms a
highly positive factor condition that not only drives evolution of that
knowledge economy but also helps drive supporting industries. For
a network to be effective, each organisation cannot exist as
separate silo, there must be an efficient transfer of tacit knowledge
between businesses such that each can enjoy the underlying factor
condition. Simply put, if a fund intends to establish a front in
London, through which it would add to the evolution and growth of
the knowledge economy in London, it must be able to access a
pool of readily available experienced professionals. This may
appear apparent but in reality, when regulations increase the
barrier to job loss in the interest of short term social benefits, it
potentially strangles the effectiveness of existing social network.
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IMPLICIT
Since tacit knowledge is embodied in each knowledge worker,
PARADIGM SHIFT
implicit within the building of knowledge economy and the
subsequent gathering of social network, is the need for each
knowledge workers to be mobile. This by itself is a paradigm shift
for many workers: employment can no longer be expected to be
guaranteed and geographical relocation, in search of suitable social
network, can be expected to increase. These, however, are
negative externalities for many workers whose main interest is in
stability. Business needs to balance these costs of change with
their economical goals. In addition, business also has a vested
interest in maintaining a functioning social network in the new
knowledge-based economy.
BUSINESS
In an environment where business can no longer offer employment
RESPONSIBILITY: stability in the conventional sense, there is a need to approach the
CREATING A
old covenant with a new perspective – to substitute employment
RESILIENT
stability with the assurance of employability. In short, business has
WORKFORCE
a responsibility to build a resilient workforce. This means giving
knowledge workers the ability to assess, develop and stay
competitive in the new economy. There is an inherent risk in this
approach – that expected short employment span will encourage
egoistic uncooperative behaviour which is detrimental to the
organisation. Therefore, prior to engaging in any change, business
needs to assess their own organisation and reinforce the purpose
of the organisation and what it means to all stakeholders.
The implementation of a resilient workforce calls for an open
environment where knowledge workers can reasonably assess the
value of their skills within the organisation as well as benchmark
their skills against market requirements. An open environment
meaning an environment where knowledge workers can engage in
frank dialogue on the business’s future direction as well as an
environment where business can help their people transit into new
market opportunities. This may be counter intuitive but there are
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potential upsides when business has a formalised strategy in
acquiring its own market network through alumni placements. In
addition, in implementation, business should also encourage and
support knowledge and skills acquisition. This can be in terms of
both tacit and structured learning. Tacit implies flexible work scope
and therefore learning through expanded experience; structured
meaning commitment of time and resource to formal education.
The formation of knowledge industry necessarily implies a mindset
change of the skilled workforce. The reduced stability is a negative
externality to the workforce and a cost that business needs to
balance with their economic bottom-line. A possible way to address
this externality, and which also reinforces the social network of the
knowledge economy, is to create a resilient workforce.
CONCLUSION
In anticipation, during the transition period from market economy to
knowledge economy, business has a responsibility to be sensitive
and responsive to the social needs of the marginalised workforce.
In actualisation, when the economy has transitioned to being more
knowledge-based, business has a responsibility to build a resilient
workforce that contributes to the workings of the knowledge
economy. In both situations, business needs to bear in mind that it
owns a triple bottom-line: economic, social and environmental. It is
not sufficient to maximise economic bottom-line alone. Balancing
all three is difficult and it requires not only market strategy but also
a corresponding well planned non-market strategy.
On hind sight, knowledge is a public good which is being managed
as if it is a scarce commodity. The current system prevents
exploitation of founder’s innovation by free riders but at the same
time potentially creates issues with market inefficiencies through
the formation of monopolies and concentrated markets. Business
has a natural interest in maintaining the current patent system in
managing knowledge distribution but is this system the most
Ashridge Business School
http://www.ashridge.org.uk
The Responsibilities of Business in a Knowledge Economy: In Anticipation and In
Actualisation
efficient system for the society? As each country grapples with the
emerging eminence of knowledge economy, there is perhaps a
need to look within and address how everyone can benefit from
innovation and the subsequent distribution of knowledge with
minimal social cost.
Ashridge Business School
http://www.ashridge.org.uk
The Responsibilities of Business in a Knowledge Economy: In Anticipation and In
Actualisation
Ministry of Economic Development, Manatu Ohanga (1999) What
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Ian, Brinkley, and Niel, Lee (2007) The Knowledge Economy in
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Emilio, J. Castilla, Hokyu, Hwang, Ellen, Granovetter, and Mark,
Granovetter Social Networks in Silicon Valley
Joint Declaration of the European Ministers of Education (1999)
Lu, Xiaohe Ethical Issues in the Gloablization of the Knowledge
Economy
European Commission, Information Society DG The Knowledge
Economy, Sustainable Development and Corporate Responsibility:
ICT and its Implicatons for Sustainable Development
Robert, H. Waterman, Jr., Judith A. Waterman, and Betsy A.
Collard (1994) Towards a Career-Resilient Workforce, Harvard
Business Review
David, P. Baron Business and its Environment, Prentice Hall
Ashridge Business School
http://www.ashridge.org.uk
Ashridge Business School
http://www.ashridge.org.uk