Financial Times - CSR is all about doing business the ethical way

This is a response to a report in The Sunday Times FT last week on Dialog Telekom and its outlook on corporate social responsibility and the way it is practised by the company.

The Labour Minister revealed recently that only two million workers of the seven million in the private sector are being paid EPF.

Quite shocking for a socially responsible corporate sector considering the number of photographs we see daily in the business pages about corporate philanthropy, perhaps the Minister may be making a hash of the numbers! However if what the minister is saying is true then we need to ask ourselves firstly why we are in business and secondly what real CSR means? So for a start when Boards of companies deliberate about CSR allocations they should look at it as an opportunity to reflect and realize that without moral and spiritual awakening in the Corporate Boardrooms there is no hope for this country and also being CSR compliant is firstly, secondly and thirdly is all about being ethical in their business practices.

A business that doles out monies to charities regularly but generates huge profits by over-pricing its products and services, is not meeting its social and community responsibilities --hence not demonstrating CSR in the true sense. Perhaps it may be better for them to cut back on their donations and focus more on competitive pricing and providing a good service.

So if Boards think that by writing a cheque to a charity they have fulfilled their social obligations, they are only fooling themselves, because in fact they are losing an important opportunity to actually engage with the community they actually sell their products to. The real CSR in effect helps a firm to reduce the cost of transactions- and thus boost profits- by building trust between a company and its suppliers, customers and the community. Take the US, their Corporate Social Responsibility had its roots in the protestant ethic and the Quaker heritage as seen in the contributions of James and George Wilson and the Clark family of 19 th Century Europe. Later to be followed by the Cadbury brothers in the UK and in the US. Then in the early 1900s, Andrew Carnegie and John D Rockefeller led the way for the establishment benevolent foundations for the distribution of private wealth for public benefit. In fact Henry Ford the father of the auto industry once said “a business that makes nothing but money is a poor kind of business”. Today the growing influence and power of corporations have challenged the ways people in communities, societies and government are able to nurture and harness businesses the world over.

This challenge had led to various attempts to develop ways to make businesses more responsible and responsive to society and was formally known as Corporate Social Responsibility or Corporate Citizenship. President of the World Bank James Wolfensohn said-“The governance of the corporation is now as important in the world economy as the governance of countries. The theories and practices underlying the creation of responsible businesses have numerous localized historical and cultural roots”.

The current CSR agenda builds on these histories and recognizes individuals working in companies, NGOs, Trade Unions and other organizations such as trade chambers with different levels of power, commitment and scope to ‘Promote Social, Environmental and Ethical Responsibility’ in companies. Take Sri Lanka: most Sri Lankans still do not have a proper understanding about the role the business community should play in society and many people still think the private sector exploits consumer and that they fail to fulfill their social obligations. In fact, many poor Sri Lankans earning less than 1 $ day have over the years taken on big MNCs for exploiting and harming the environment. Through their demonstrations and protests they have in fact forced big companies to become socially responsible and to help the community around which they conduct business to grow and develop. Also many times civil society has told the private sector to get on with it, if not society and the government would lose confidence in the private sector. In fact many political leaders have told the captains of the private sector to make use of the generous incentives to expand, grow and create jobs. The problem with the Lankan private sector in general is that it lacks the maturity of a developed market. Many companies have still to realize that they have a strong social role to play in addressing some of community needs that the government is failing to provide. They fail to understand that companies don’t operate in a vacuum and that its success is dependent on the fulfillment of certain obligations to society.

In a corporate world obsessed with maximizing returns the question of the private sector taking a lead role in social betterment projects, is rarely on many corporate agendas. However research suggests that investing in the well-being of their communities is good for their business. Furthermore, today it is becoming increasingly difficult for the private sector to exist and function in isolation.

Our society at last has recognized the need for our private sector to take on greater responsibility in matters affecting our society. It make sense for the private sector to take an intense interest and continuing interest in public issues, because, when society disintegrates, the private sector will find it increasingly difficult to reap the benefits of their investment even though the purpose of any business is to satisfy customers continuously at a profit to itself. Large corporates in Asia have struck partnerships with governments and community leaders to strengthen their communities with which they do business.

They have realized that their investment is not just charity and that investing in the well being of their communities is becoming necessary for their long-term survival.

They also know that it could benefit them by way of brand loyalty, enhancing the long term sustainability of their investment, better potential employees and above all that it helps create a stable society.

From a business point of view the argument that is most often heard in favour of a firm’s involvement in social activities is that such activities can improve a company’s public image and help to attract new customers, investors and better employees. It is also argued that such activities may reduce the enactment of government regulations, which are costly and restrictive to the management decision-making process. However, it is maintained that involvement in social activities undermine the efficiency of the corporation and misdirects limited resources, serving only to increase costs and the price to the customers.

Another argument against it is that there is frequently a measurement problem. That is to say most firms, which provide voluntary social information in their annual reports, describe their actions in qualitative rather than quantitative terms. Further more the private sector has to take risks in order to give a reasonable return to the shareholders. They also have to repay the loans borrowed from banks and also retain a portion for expansion, failure to understand this has also led to the criticism of the private sector. From the employer’s view a business enterprise provides its employees with salaries and wages, so the employees are concerned with the ability of the enterprise to generate favourable cash flows.

Nevertheless, they may be concerned with plant and product safety, statutory dues, training programmes and fair business practices. On the other hand, as a member of the community, the employees may also be interested in the firm’s community involvement. However, employees may see these activities as increasing expenditure and affecting their wages and benefits. It has been pointed out that managers have social concern but, unlike other employees, management is in the unique position of being able to initiate social programmes and activities.

Sri Lankan experience

Some companies in Sri Lanka now embrace the role of good corporate governance not only because it is the right thing to do, but also because they know giving something back to the communities it serves would ensure its own survival in the long term. Furthermore, employees of companies that participate in social work, also tend to work harder to invest in the communities they operate. Not only is this good for business, it is also good stewardship. Often good corporate citizenship is discussed in terms of doing what’s right, but as business managers we should believe that doing the right thing, keeping to the moral code, is a natural by product of acting out of compassion.

Therefore, compassion uses power to serve and wealth to expand its capacity to serve. Many private sector companies still don’t realize that they can only prosper in a society that is permeated by social equity and a basic sense of fulfillment. If the private sector is to become the engine of growth in the country, they should take on more of the community activities that the state provides.

The community’s needs are what they are ultimately servicing through their various enterprises, and apart from anything else it makes perfect business sense to do more for the community. Therefore, companies that want to make itself economically superior should also be environmentally sound and socially responsible. In fact, many people have slammed the private industrial sector for what they discerned as showing arrogance towards the country’s environment and energy needs. It goes without saying that the private sector cannot function effectively when social tensions are riding high, also if one thinks of the social obligations of the private sector, it should promote practices that creates an image of itself which is on the right side of the moral values, if it fails to do so it can contribute towards it own downfall and invite state regulation. On the other hand if the public feels the private sector exploits consumers and destroy social values, the private sector should collectively address this issue and perhaps look at self-regulation to balance the social and environmental interests of business with the broader community. Then the private sector involvement in national affairs according to many analysts has also become necessary because our political leaders are resting their hopes on policies that will be harmful for the country. Therefore it is necessary for the private sector to come forward strongly to pull our nation together to cope with the challenges of the future. In this context the private sector should come out strongly to promote a peaceful resolution of the ethnic conflict and not leave it to the government only.

Our private sector is still branded by many as being only profit oriented and exploiters perhaps because certain sections of the private sector that support political parties obtain necessary approvals with no apparent regard for the social costs associated with a project or a government tender. These sections of the private sector have tarnished the good image of the larger private sector, which is conscious of its social obligations. It is generally felt that it is the role of the state to provide welfare facilities, as the private sector contributes more effectively to economic development.

The private sector employs 7 million people and also is the biggest direct tax payer. Therefore the revenue collected from the private sector should be targeted more creatively for social welfare and national security, thereby reducing the strain on the private sector. But in Sri Lanka successive governments have failed to even provide the basic needs of their communities and have only perpetuated the suffering of the poor and the powerless.

So in the final analysis it makes perfect sense for companies to work with the government to create a critical mass of ethical consciousness in government and also in the private sector.