1. Elements of Sustainability - from a practical point of view
We discussed various interfaces in organizations that lead to sustainability issues.
(a)Materials, Machine, Technology: Resource consumption, wastes and emissions, eco-efficiency, energy efficiency, Eco-Design (Design for environment), product & process innovation and quality, packaging, green purchasing, logistics, Research & Development & patents
(b)Employees: Occupational Health & Safety, employee compensation/benefits, employees' union, inclusion & diversity, discrimination, gender bias/harassment, insider trading, ethics, bribery & corruption, employee productivity, employee morale and loyalty
(c) other stakeholders (e.g. NGOs, community etc.): Fair & ethical behaviour, socially relevant business, social programmes, philanthropy, ecological footprints, emergency response, complaints response, product safety, legal compliance
(d) Money and Markets: interest rates, exchange rates, credit rating, stock value, DJSI score, profits and dividends, taxes, niche markets,competition, new and emerging markets, brand value/image
In terms of practices in business many of these issues are identified and acted on as: Resource productivity/eco-efficiency, air emissions, water/liquid discharges, soil contamination, energy efficiency, eco-design, green products, green purchasing, Sustainable new businesses, occupational and health, Global Compact, employee engagement, stakeholder engagement, General Business Principles (Code of conduct of business), human right, social accountability, corporate philanthropy, social activities, wages, dividends, taxes, value of purchases, profits etc.
2. Economic issues - wages, taxes, purchases (materials and services)
Salaries/wages help to develop the local economy. There are many examples of communities depending on the salaries earned by employees - e.g. Jamshedpur, Bhilai, Nagda. Taxes are used by the Government for social issues. Purchases again lead to economic development; if purchases are local, then the local economy gets benefited.
3. Environmenal issues - Environment / Business link, characteristics of environment, environmental conflicts, conflict resolutions, business response to environmental issues, environmental issues in the life-cycle of products
We discussed the three major functions of the physical environment, viz., (a) source for resources, (b) sink for the waste and (c) provider of amenity value. Development is the use of natural resources available in the biosphere for the benefit of the community through products and services. While a part of the resources are used by the business for useful products and services, a part of the resource becomes waste. Enviornment acts as a sink for the waste. If waste is added to the environment at a rate beyond the carrying capacity of the eco-system, the system will collapse. If the waste is disposed off without consideration for the enviornment, the environment may lose its amenity value (e.g. dirty beaches, strewn with plastics bags and cups).
The three characteristics of the physical environment are:(a) Common Property, (b) Multiple Use and (c) Uncovered cost
One of the major problems of the physical environment is that it belongs to everyone; everyone thinks that someone else will take care of it. It is like our keeping our flat clean by sweeping it everyday, but throwing the sweepings on to a common place, because the common place belongs to everyone. Air, water, earth, fauna and flora and the biosphere belong to the whole humanity; but in the absence of individual responsibility we allow these common properties to deteriorate, which in turn will affect all us. (Discussed Tragedy of Commons - please google and find out more about this term)
Natural resources are used for many purposes. For example, water is used for drinking, cooking, cleaning, washing, gardening, irrigation, sports, transportation, cooling, as solvent, in an industry etc. If the resource is scarce (clean water is indeed a scarce resource) and there are multiple demands for this scarce resource, conflicts are bound to arise (e.g. we discussed Sinar Mas Paper mills)
Another important characteristics of natural resources is that when such resouces are used certain costs are not covered. In the conventional cost accounting we do not consider the environmental cost in calcuating the cost of an activity. For example if one is asked to calculate the cost of travel between your house and the college, one would consider the price of the motor cycle (interest & depreciation), cost of petrol, cost of maintenance, cost of insurance, etc. But not the cost of damage done to the environment due to the emissions from the exhaust, the cost of health care of people who are affected by such emissions, the cost of lost work days, the cost of physical diabilities brought in by autoemissions etc. These uncovered costs are now distributed on the society. This is potentially a conflict issue if the problem of emission goes beyond one's tolerance limits (we discussed briefly the CNG introduction in Delhi; ban on vehicles older than 15 years etc.)
We (the society) cannot allow these potential conflict situations developing into actual conflicts. Society uses three types of conflict resolution/prevention techniques, viz., (a) Command and Control, (b) Economic Instruments and (c) Voluntary initiatives.
Command & Control is the technique used by Governments to see that the society behaves within certain parameters, which are supposed to be safe, of environmental performance. For example it enacts acts and rules, like the Water (prevention & control of Pollution) Act or Air (prevention & control pollution) act to prevent and reduce water and air pollution respectively. (see http://envfor.nic.in for Indian environmental acts and rules). Statutory authorities implement these acts and rules using regulations, like the standards for emissions, discharges etc. In this way the Government tries to ensure that the common resources are used diligently by the society (we also discussed about PUC for your vehicle). (We had a brief discussion on RoHS and REACH)
The second technique used for conflict avoidance/resolution is the use of Economic instruments; this can be through the Government or through individual players. Government can give tax concession or impose tax depending on if an activity or product is environmentally sound or not. For example the Government (Water (Prevention & Control of Pollution) Cess Act)may give concession on water cess if hte industry establishes an effluent treatment facility to treat the polluted water before discharging it. It can give concession on customs duty for pollution control equipments. These concessions encourage environmentally sound behaviour of the society. One example of economic instrument that is very popular now is the "carbon credit"; this is similar to emission trading. By reducing the emission of greenhouse gas emissions (GHG) through approved CDM projects one can earn what are called Carbon credits, which can then be sold to buyers from developed countries who have a mandate to reduce their GHG emissions. Here the Government acts as a facilitator. Individual companies can similarly influence the way society behaves; for example the "deposit-refund" system is used for getting back used products or packaging by charging a deposit when the product is bought and paying the customer an amount when the product or packaging is brought back to the dealer at the end of life of the product. (I explained how the Cocacola cans were picked up by old people in the USA to give them back to the corner shops to get a few cents).
The lecture stopped at this point on day 2.
Paper for Discussion:
The Link between Competitive Advantage and Corporate Social Responsibility
by Michael E. Porter and Mark R. Kramer
Harvard Business Review (December, 2006)
We had some lively discussion during the reading of this paper; keep it up.
We stopped at page 2, last but one paragraph. We start from Four prevailing justifications for CSR in the next reading on Jan 5, 2009.
Tuesday, December 23, 2008
Sunday, December 21, 2008
Lecture 1: 22 December, 2008
Corporate Social Responsibility - Lecture 1 (22.12.2008)
1. Stakeholders for a business entity: Customers, Suppliers, Government, community (local, international), employees, investors/banks, stockholders, environment, Non-Governmental organizations (NGO) etc.
2. Corporate Social responsibility (CSR) has evolved from a mere "philanthropic activity" to a wider subject of managing the interface of the business entity with various stakeholders
3. Now CSR = Sustainability
4. Sustainability is the term derived from Sustainable Development, a term used by Mrs. Brundtland in her UN report "Our Common Future" (1987). Sustainable Development was defined by her as, "the development that meets the needs of the present generation without compromising the ability of the future generations to meet their own needs"
5. Sustainability (CSR) is three dimensional - economic, environmental and social; a sustainable organization is one that is (a) economically viable, (b) environmentally sound and (c) socially acceptable. Sustainability is also called the Triple Bottomline approach, distinguishing it from the more popular financial bottomline approach of many business organizations. It is also called the 3 P approach: Planet (natural resources, energy), People (health & safety, equity) and Profit (economic growth)
6. One of the characteristics of the Sustainability approach is to "think differently" ("The world we have created today as a result of our thinking thus far has problems that cannot be solved by thinking the way we thought when we created them" - Albert Einstein) - business as usual approach does not work.
7. Example of thinking differently: "Pollution is resources not positioned at their maximally effective location" Buckminster Fuller - i.e. pollution is nothing but a resouce at a wrong place. (Google Buckminster Fuller and know more about his work). We discussed carbondioxide at the exhaust and in a soda water bottle.
8. Sustanability offers us new opportunities - the result of thinking differently. We discussed about inventing a gadget that could convert the carbondioxide emitted from your vehicle into soda water !
9. There are various views on different aspects of CSR (Sustainability). For example, philanthropy, has been criticized by Prof. Milton Friedman. ("There is only one responsibility for business, namely to use its resources and engage in activities designed to increase its profits") (Google Milton Friedman and know more about his views on business)
10. Peter Drucker has a different view: "Profit for a company is like oxygen for a person. If you don't have enough of it, you are out of the game. But if you think that your life is about breathing, you are missing something"
11. Know more about Peter Senge's "The necessary revolution: How individuals and organizations are working together to create a Sustainable World"
12. Globalization has made Sustainability an imperative for business; while the organized sector caters to about 500 million people all over the world, there are about 4500 million people who are unable to reap the benefits of this economic prosperity adequately. Among these about 2.5 billion people live on less than 2 US $ earning (adjusted for purchasing power parity) a day. While the business uses this population for its activities, this population also gets more exposed to the environmental degradation caused by the business activity, more than other sections of the society. There is, therefore, a compelling need for business to understand its effect on the deprived populations and to help them to over come the effects of their business activity.
13. Sustainability issues affect all the four basic business goals, viz., (a) to be alive, (b) to grow, (c) to make profits and (d) to be accepted by the society. Examples of Union Carbide (Bhopal) - which is no more alive because it failed to address environmental issues -, Enron, Arthur Anderson - which are not alive because of accounting frauds by its managers (ethical)were discussed. We also discussed the retirement benefits sought and obtained by Jack Welch, espcially for his mother-in-law - an ethical issue. (Google Enron, Arthur Anderson and Jack Welch and find out more about them)
14. Definition of CSR: "Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large" (www.wbcsd.org)
(World Business Council for Sustainable Development)
In the second half we discussed the following paper by Milton Friedman:
Milton Friedman on Corporate Social Responsibility
The Social Responsibility of Business is to Increase its Profits
by Milton Friedman
The New York Times Magazine, September 13, 1970.
(Copyright @ 1970 by The New York Times Company.)
When I hear businessmen speak eloquently about the "social responsibilities of business in a free-enterprise system," I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are–or would be if they or anyone else took them seriously–preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.
The discussions of the "social responsibilities of business" are notable for their analytical looseness and lack of rigor. What does it mean to say that "business" has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.
Presumably, the individuals who are to be responsible are businessmen, which means individual proprietors or corporate executives. Most of the discussion of social responsibility is directed at corporations, so in what follows I shall mostly neglect the individual proprietors and speak of corporate executives.
In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for example, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.
In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them. Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straightforward, and the persons among whom a voluntary contractual arrangement exists are clearly defined.
Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he recognizes or assumes voluntarily–to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to devote part of his income to causes he regards as worthy, to refuse to work for particular corporations, even to leave his job, for example, to join his country's armed forces. If we wish, we may refer to some of these responsibilities as "social responsibilities." But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are "social responsibilities," they are the social responsibilities of individuals, not of business.
What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price in crease would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire "hardcore" unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.
In each of these cases, the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.
The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct "social responsibility," rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it. But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.
This process raises political questions on two levels: principle and consequences. On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public–after all, "taxation without representation" was one of the battle cries of the American Revolution. We have a system of checks and balances to separate the legislative function of imposing taxes and enacting expenditures from the executive function of collecting taxes and administering expenditure programs and from the judicial function of mediating disputes and interpreting the law.
Here the businessman–self-selected or appointed directly or indirectly by stockholders–is to be simultaneously legislator, executive and, jurist. He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds–all this guided only by general exhortations from on high to restrain inflation, improve the environment, fight poverty and so on and on.
The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for "social" purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil servants–insofar as their actions in the name of social responsibility are real and not just window-dressing–should be selected as they are now. If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expenditures to foster "social" objectives, then political machinery must be set up to make the assessment of taxes and to determine through a political process the objectives to be served.
This is the basic reason why the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses. On the grounds of consequences, can the corporate executive in fact discharge his alleged "social responsibilities?" On the other hand, suppose he could get away with spending the stockholders' or customers' or employees' money. How is he to know how to spend it? He is told that he must contribute to fighting inflation. How is he to know what action of his will contribute to that end? He is presumably an expert in running his company–in producing a product or selling it or financing it. But nothing about his selection makes him an expert on inflation. Will his hold ing down the price of his product reduce inflationary pressure? Or, by leaving more spending power in the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce less because of the lower price, will it simply contribute to shortages? Even if he could answer these questions, how much cost is he justified in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropriate share of others?
And, whether he wants to or not, can he get away with spending his stockholders', customers' or employees' money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have reduced the corporation's profits and the price of its stock.) His customers and his employees can desert him for other producers and employers less scrupulous in exercising their social responsibilities.
This facet of "social responsibility" doctrine is brought into sharp relief when the doctrine is used to justify wage restraint by trade unions. The conflict of interest is naked and clear when union officials are asked to subordinate the interest of their members to some more general purpose. If the union officials try to enforce wage restraint, the consequence is likely to be wildcat strikes, rank-and-file revolts and the emergence of strong competitors for their jobs. We thus have the ironic phenomenon that union leaders–at least in the U.S.–have objected to Government interference with the market far more consistently and courageously than have business leaders.
The difficulty of exercising "social responsibility" illustrates, of course, the great virtue of private competitive enterprise–it forces people to be responsible for their own actions and makes it difficult for them to "exploit" other people for either selfish or unselfish purposes. They can do good–but only at their own expense.
Many a reader who has followed the argument this far may be tempted to remonstrate that it is all well and good to speak of Government's having the responsibility to impose taxes and determine expenditures for such "social" purposes as controlling pollution or training the hard-core unemployed, but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.
Aside from the question of fact–I share Adam Smith's skepticism about the benefits that can be expected from "those who affected to trade for the public good"–this argument must be rejected on grounds of principle. What it amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures. In a free society, it is hard for "evil" people to do "evil," especially since one man's good is another's evil.
I have, for simplicity, concentrated on the special case of the corporate executive, except only for the brief digression on trade unions. But precisely the same argument applies to the newer phenomenon of calling upon stockholders to require corporations to exercise social responsibility (the recent G.M crusade for example). In most of these cases, what is in effect involved is some stockholders trying to get other stockholders (or customers or employees) to contribute against their will to "social" causes favored by the activists. Insofar as they succeed, they are again imposing taxes and spending the proceeds.
The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his "social responsibility," he is spending his own money, not someone else's. If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any objection to his doing so. In the process, he, too, may impose costs on employees and customers. However, because he is far less likely than a large corporation or union to have monopolistic power, any such side effects will tend to be minor.
Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.
To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects. Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to charities they favor by having the corporation make the gift than by doing it themselves, since they can in that way contribute an amount that would otherwise have been paid as corporate taxes.
In each of these–and many similar–cases, there is a strong temptation to rationalize these actions as an exercise of "social responsibility." In the present climate of opinion, with its wide spread aversion to "capitalism," "profits," the "soulless corporation" and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.
It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundations of a free society. That would be to call on them to exercise a "social responsibility"! If our institutions, and the attitudes of the public make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them. At the same time, I can express admiration for those individual proprietors or owners of closely held corporations or stockholders of more broadly held corporations who disdain such tactics as approaching fraud.
Whether blameworthy or not, the use of the cloak of social responsibility, and the nonsense spoken in its name by influential and prestigious businessmen, does clearly harm the foundations of a free society. I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely farsighted and clearheaded in matters that are internal to their businesses. They are incredibly shortsighted and muddleheaded in matters that are outside their businesses but affect the possible survival of business in general. This shortsightedness is strikingly exemplified in the calls from many businessmen for wage and price guidelines or controls or income policies. There is nothing that could do more in a brief period to destroy a market system and replace it by a centrally controlled system than effective governmental control of prices and wages.
The shortsightedness is also exemplified in speeches by businessmen on social responsibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse.
The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate. There are no values, no "social" responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form.
The political principle that underlies the political mechanism is conformity. The individual must serve a more general social interest–whether that be determined by a church or a dictator or a majority. The individual may have a vote and say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.
Unfortunately, unanimity is not always feasible. There are some respects in which conformity appears unavoidable, so I do not see how one can avoid the use of the political mechanism altogether.
But the doctrine of "social responsibility" taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business–to use it 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."
1. Stakeholders for a business entity: Customers, Suppliers, Government, community (local, international), employees, investors/banks, stockholders, environment, Non-Governmental organizations (NGO) etc.
2. Corporate Social responsibility (CSR) has evolved from a mere "philanthropic activity" to a wider subject of managing the interface of the business entity with various stakeholders
3. Now CSR = Sustainability
4. Sustainability is the term derived from Sustainable Development, a term used by Mrs. Brundtland in her UN report "Our Common Future" (1987). Sustainable Development was defined by her as, "the development that meets the needs of the present generation without compromising the ability of the future generations to meet their own needs"
5. Sustainability (CSR) is three dimensional - economic, environmental and social; a sustainable organization is one that is (a) economically viable, (b) environmentally sound and (c) socially acceptable. Sustainability is also called the Triple Bottomline approach, distinguishing it from the more popular financial bottomline approach of many business organizations. It is also called the 3 P approach: Planet (natural resources, energy), People (health & safety, equity) and Profit (economic growth)
6. One of the characteristics of the Sustainability approach is to "think differently" ("The world we have created today as a result of our thinking thus far has problems that cannot be solved by thinking the way we thought when we created them" - Albert Einstein) - business as usual approach does not work.
7. Example of thinking differently: "Pollution is resources not positioned at their maximally effective location" Buckminster Fuller - i.e. pollution is nothing but a resouce at a wrong place. (Google Buckminster Fuller and know more about his work). We discussed carbondioxide at the exhaust and in a soda water bottle.
8. Sustanability offers us new opportunities - the result of thinking differently. We discussed about inventing a gadget that could convert the carbondioxide emitted from your vehicle into soda water !
9. There are various views on different aspects of CSR (Sustainability). For example, philanthropy, has been criticized by Prof. Milton Friedman. ("There is only one responsibility for business, namely to use its resources and engage in activities designed to increase its profits") (Google Milton Friedman and know more about his views on business)
10. Peter Drucker has a different view: "Profit for a company is like oxygen for a person. If you don't have enough of it, you are out of the game. But if you think that your life is about breathing, you are missing something"
11. Know more about Peter Senge's "The necessary revolution: How individuals and organizations are working together to create a Sustainable World"
12. Globalization has made Sustainability an imperative for business; while the organized sector caters to about 500 million people all over the world, there are about 4500 million people who are unable to reap the benefits of this economic prosperity adequately. Among these about 2.5 billion people live on less than 2 US $ earning (adjusted for purchasing power parity) a day. While the business uses this population for its activities, this population also gets more exposed to the environmental degradation caused by the business activity, more than other sections of the society. There is, therefore, a compelling need for business to understand its effect on the deprived populations and to help them to over come the effects of their business activity.
13. Sustainability issues affect all the four basic business goals, viz., (a) to be alive, (b) to grow, (c) to make profits and (d) to be accepted by the society. Examples of Union Carbide (Bhopal) - which is no more alive because it failed to address environmental issues -, Enron, Arthur Anderson - which are not alive because of accounting frauds by its managers (ethical)were discussed. We also discussed the retirement benefits sought and obtained by Jack Welch, espcially for his mother-in-law - an ethical issue. (Google Enron, Arthur Anderson and Jack Welch and find out more about them)
14. Definition of CSR: "Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large" (www.wbcsd.org)
(World Business Council for Sustainable Development)
In the second half we discussed the following paper by Milton Friedman:
Milton Friedman on Corporate Social Responsibility
The Social Responsibility of Business is to Increase its Profits
by Milton Friedman
The New York Times Magazine, September 13, 1970.
(Copyright @ 1970 by The New York Times Company.)
When I hear businessmen speak eloquently about the "social responsibilities of business in a free-enterprise system," I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are–or would be if they or anyone else took them seriously–preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.
The discussions of the "social responsibilities of business" are notable for their analytical looseness and lack of rigor. What does it mean to say that "business" has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.
Presumably, the individuals who are to be responsible are businessmen, which means individual proprietors or corporate executives. Most of the discussion of social responsibility is directed at corporations, so in what follows I shall mostly neglect the individual proprietors and speak of corporate executives.
In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for example, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.
In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them. Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straightforward, and the persons among whom a voluntary contractual arrangement exists are clearly defined.
Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he recognizes or assumes voluntarily–to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to devote part of his income to causes he regards as worthy, to refuse to work for particular corporations, even to leave his job, for example, to join his country's armed forces. If we wish, we may refer to some of these responsibilities as "social responsibilities." But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are "social responsibilities," they are the social responsibilities of individuals, not of business.
What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price in crease would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire "hardcore" unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.
In each of these cases, the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.
The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct "social responsibility," rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it. But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.
This process raises political questions on two levels: principle and consequences. On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public–after all, "taxation without representation" was one of the battle cries of the American Revolution. We have a system of checks and balances to separate the legislative function of imposing taxes and enacting expenditures from the executive function of collecting taxes and administering expenditure programs and from the judicial function of mediating disputes and interpreting the law.
Here the businessman–self-selected or appointed directly or indirectly by stockholders–is to be simultaneously legislator, executive and, jurist. He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds–all this guided only by general exhortations from on high to restrain inflation, improve the environment, fight poverty and so on and on.
The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for "social" purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil servants–insofar as their actions in the name of social responsibility are real and not just window-dressing–should be selected as they are now. If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expenditures to foster "social" objectives, then political machinery must be set up to make the assessment of taxes and to determine through a political process the objectives to be served.
This is the basic reason why the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses. On the grounds of consequences, can the corporate executive in fact discharge his alleged "social responsibilities?" On the other hand, suppose he could get away with spending the stockholders' or customers' or employees' money. How is he to know how to spend it? He is told that he must contribute to fighting inflation. How is he to know what action of his will contribute to that end? He is presumably an expert in running his company–in producing a product or selling it or financing it. But nothing about his selection makes him an expert on inflation. Will his hold ing down the price of his product reduce inflationary pressure? Or, by leaving more spending power in the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce less because of the lower price, will it simply contribute to shortages? Even if he could answer these questions, how much cost is he justified in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropriate share of others?
And, whether he wants to or not, can he get away with spending his stockholders', customers' or employees' money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have reduced the corporation's profits and the price of its stock.) His customers and his employees can desert him for other producers and employers less scrupulous in exercising their social responsibilities.
This facet of "social responsibility" doctrine is brought into sharp relief when the doctrine is used to justify wage restraint by trade unions. The conflict of interest is naked and clear when union officials are asked to subordinate the interest of their members to some more general purpose. If the union officials try to enforce wage restraint, the consequence is likely to be wildcat strikes, rank-and-file revolts and the emergence of strong competitors for their jobs. We thus have the ironic phenomenon that union leaders–at least in the U.S.–have objected to Government interference with the market far more consistently and courageously than have business leaders.
The difficulty of exercising "social responsibility" illustrates, of course, the great virtue of private competitive enterprise–it forces people to be responsible for their own actions and makes it difficult for them to "exploit" other people for either selfish or unselfish purposes. They can do good–but only at their own expense.
Many a reader who has followed the argument this far may be tempted to remonstrate that it is all well and good to speak of Government's having the responsibility to impose taxes and determine expenditures for such "social" purposes as controlling pollution or training the hard-core unemployed, but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.
Aside from the question of fact–I share Adam Smith's skepticism about the benefits that can be expected from "those who affected to trade for the public good"–this argument must be rejected on grounds of principle. What it amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures. In a free society, it is hard for "evil" people to do "evil," especially since one man's good is another's evil.
I have, for simplicity, concentrated on the special case of the corporate executive, except only for the brief digression on trade unions. But precisely the same argument applies to the newer phenomenon of calling upon stockholders to require corporations to exercise social responsibility (the recent G.M crusade for example). In most of these cases, what is in effect involved is some stockholders trying to get other stockholders (or customers or employees) to contribute against their will to "social" causes favored by the activists. Insofar as they succeed, they are again imposing taxes and spending the proceeds.
The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his "social responsibility," he is spending his own money, not someone else's. If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any objection to his doing so. In the process, he, too, may impose costs on employees and customers. However, because he is far less likely than a large corporation or union to have monopolistic power, any such side effects will tend to be minor.
Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.
To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects. Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to charities they favor by having the corporation make the gift than by doing it themselves, since they can in that way contribute an amount that would otherwise have been paid as corporate taxes.
In each of these–and many similar–cases, there is a strong temptation to rationalize these actions as an exercise of "social responsibility." In the present climate of opinion, with its wide spread aversion to "capitalism," "profits," the "soulless corporation" and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.
It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundations of a free society. That would be to call on them to exercise a "social responsibility"! If our institutions, and the attitudes of the public make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them. At the same time, I can express admiration for those individual proprietors or owners of closely held corporations or stockholders of more broadly held corporations who disdain such tactics as approaching fraud.
Whether blameworthy or not, the use of the cloak of social responsibility, and the nonsense spoken in its name by influential and prestigious businessmen, does clearly harm the foundations of a free society. I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely farsighted and clearheaded in matters that are internal to their businesses. They are incredibly shortsighted and muddleheaded in matters that are outside their businesses but affect the possible survival of business in general. This shortsightedness is strikingly exemplified in the calls from many businessmen for wage and price guidelines or controls or income policies. There is nothing that could do more in a brief period to destroy a market system and replace it by a centrally controlled system than effective governmental control of prices and wages.
The shortsightedness is also exemplified in speeches by businessmen on social responsibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse.
The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate. There are no values, no "social" responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form.
The political principle that underlies the political mechanism is conformity. The individual must serve a more general social interest–whether that be determined by a church or a dictator or a majority. The individual may have a vote and say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.
Unfortunately, unanimity is not always feasible. There are some respects in which conformity appears unavoidable, so I do not see how one can avoid the use of the political mechanism altogether.
But the doctrine of "social responsibility" taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business–to use it 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."
Syllabus, Credit and Evaluation
Marking Scheme for Half Credit Paper (50 marks):
30 - Term End Examination
05 - Attendance
15 - Concurrent Evaluation * (Any One or Two Tests out of A,B or C)
50 - Total Marks
* For Concurrent Evaluation, the Concerned Faculty will decide the type of test.
A] Written Home Assignment/Group Case/Role play or group problem presentation/Group or Individual Viva
B] Individual written assignment with open book mode
C] Class Test/Quiz/Multiple Choice Test
COMMON GUIDELINES
1] Concurrent evaluation will take place through Tests A,B,C
2] The above suggested system is for all the subjects i.e. half credit as well as full credit.
3] There will NOT be any external examination for half credit paper but only internal evaluation will take place in the above mentioned new format.
4] There will NOT be any retest or re-examination for any subject and in case student remains absent he will not get any marks.
5] There will be external examination for only full credit subjects at the end of the trimester.
Syllabus:
Subject: Corporate Social Responsibility Credit: H
Topics
I. Building Blocks of CSR / Sustainability
1. Overview of CSR/Sustainability
2. The Triple Bottom-line Approach
3. Philanthropy – Conventional and Strategic
4. Environmental issues
5. Social issues
6. Labour and related issues
7. Ethical and Governance issues
8. Human Rights – UN Charter
II. Standards and Codes
1. ISO – 14001
2. OHSAS – 18001
3. SA – 8000
4. OECD Guidelines for Multinational Companies
5. Global Compact
6. AA – 1000
7. BS / ISO Guideline on CSR Management (ISO-26000)
III. Engaging the stakeholder
1. Global Reporting Initiative Guideline G-3
2. NGO and CSR
3. Programs for the neighborhood
4. Markets at the BOP
5. Communication
6. Dilemmas
7. Dow Jones Sustainability Index / FTSE4GOOD Index
IV. Cases and Papers
1. What is a Business for? Charles Handy, Harvard Business Review, December 2002
2. The Competitive Advantage of Corporate Philanthropy, Michael E Porter and Mark R Kramer, Harvard Business Review, pp 6-16, December 2002
3. Green and Competitive: Ending the Stalemate, Michael E Porter and Class van der Linde, Harvard Business Review, pp 120-133, September-October 1995
4. What Matters Most: Corporate Values and Social Responsibility, Jeffrey Hollender, California management Review, pp 111-119, Volume 46(4), 2004
5. Corruption in International Business, Harvard Business Case 9-701-128, December 2001
6. Corporate Social Responsibility: Whether or How? N. Craig Smith, California Management Review, pp 52-76, Volume 45(4), Summer 2003
7. The Discipline of building character, Joseph L. Badaracco Jr., Harvard Business Review, pp 115-124, March – April 1998
8.Accounting Fraud at Worldcom, Robert S Kaplan and David Kiron, Harvard Business School Case study 9-104-071, May 2005, Management Lessons from Enron, B. Bowonder, TMTC, 2006
9. The Parable of the Sadhu, Bowen H. McCoy, Harvard Business Review, May-June 1997
10. Corporate Social Responsibility: the WBCSD, Geneva, 2004
Assessment: Internal Evaluation
General Reading:
1.Changing Course, Stephan Schmidheiny & BCSD, MIT Press, 1992
2.Harvard Business Review on Business & the Environment, Harvard Business School Press, 2000
3.The fortune at the Bottom of the Pyramid, C.K. Prahalad, Wharton School Publishing, 2005
4.The Skeptical Environmentalist: Measuring the real estate of the World, Bjorn Lomborg, Cambridge University Press, 2001
5.Cradle to Cradle: Remarking the Way We Make things, William KcDonough and Michael Braungart, North Point Press, 2002
6.Natural Capitalism: Creating the next Industrial Revolution, Paul Hawken, Amory Lovins & L. Hunter Lovins, 1999
7. The Sustainability Wave: Building Boardroom Buy-in (Conscientious Commerce), Bob Willard, 2007
30 - Term End Examination
05 - Attendance
15 - Concurrent Evaluation * (Any One or Two Tests out of A,B or C)
50 - Total Marks
* For Concurrent Evaluation, the Concerned Faculty will decide the type of test.
A] Written Home Assignment/Group Case/Role play or group problem presentation/Group or Individual Viva
B] Individual written assignment with open book mode
C] Class Test/Quiz/Multiple Choice Test
COMMON GUIDELINES
1] Concurrent evaluation will take place through Tests A,B,C
2] The above suggested system is for all the subjects i.e. half credit as well as full credit.
3] There will NOT be any external examination for half credit paper but only internal evaluation will take place in the above mentioned new format.
4] There will NOT be any retest or re-examination for any subject and in case student remains absent he will not get any marks.
5] There will be external examination for only full credit subjects at the end of the trimester.
Syllabus:
Subject: Corporate Social Responsibility Credit: H
Topics
I. Building Blocks of CSR / Sustainability
1. Overview of CSR/Sustainability
2. The Triple Bottom-line Approach
3. Philanthropy – Conventional and Strategic
4. Environmental issues
5. Social issues
6. Labour and related issues
7. Ethical and Governance issues
8. Human Rights – UN Charter
II. Standards and Codes
1. ISO – 14001
2. OHSAS – 18001
3. SA – 8000
4. OECD Guidelines for Multinational Companies
5. Global Compact
6. AA – 1000
7. BS / ISO Guideline on CSR Management (ISO-26000)
III. Engaging the stakeholder
1. Global Reporting Initiative Guideline G-3
2. NGO and CSR
3. Programs for the neighborhood
4. Markets at the BOP
5. Communication
6. Dilemmas
7. Dow Jones Sustainability Index / FTSE4GOOD Index
IV. Cases and Papers
1. What is a Business for? Charles Handy, Harvard Business Review, December 2002
2. The Competitive Advantage of Corporate Philanthropy, Michael E Porter and Mark R Kramer, Harvard Business Review, pp 6-16, December 2002
3. Green and Competitive: Ending the Stalemate, Michael E Porter and Class van der Linde, Harvard Business Review, pp 120-133, September-October 1995
4. What Matters Most: Corporate Values and Social Responsibility, Jeffrey Hollender, California management Review, pp 111-119, Volume 46(4), 2004
5. Corruption in International Business, Harvard Business Case 9-701-128, December 2001
6. Corporate Social Responsibility: Whether or How? N. Craig Smith, California Management Review, pp 52-76, Volume 45(4), Summer 2003
7. The Discipline of building character, Joseph L. Badaracco Jr., Harvard Business Review, pp 115-124, March – April 1998
8.Accounting Fraud at Worldcom, Robert S Kaplan and David Kiron, Harvard Business School Case study 9-104-071, May 2005, Management Lessons from Enron, B. Bowonder, TMTC, 2006
9. The Parable of the Sadhu, Bowen H. McCoy, Harvard Business Review, May-June 1997
10. Corporate Social Responsibility: the WBCSD, Geneva, 2004
Assessment: Internal Evaluation
General Reading:
1.Changing Course, Stephan Schmidheiny & BCSD, MIT Press, 1992
2.Harvard Business Review on Business & the Environment, Harvard Business School Press, 2000
3.The fortune at the Bottom of the Pyramid, C.K. Prahalad, Wharton School Publishing, 2005
4.The Skeptical Environmentalist: Measuring the real estate of the World, Bjorn Lomborg, Cambridge University Press, 2001
5.Cradle to Cradle: Remarking the Way We Make things, William KcDonough and Michael Braungart, North Point Press, 2002
6.Natural Capitalism: Creating the next Industrial Revolution, Paul Hawken, Amory Lovins & L. Hunter Lovins, 1999
7. The Sustainability Wave: Building Boardroom Buy-in (Conscientious Commerce), Bob Willard, 2007
Introduction
Hi
In order to enable to you to access the teaching material that I use during the CSR course at INDSEARCH, I thought I will start this blog. This is available to those students who attend the classes. Let me try to put in whatever I teach in this blog serially. That will be useful to you during examinations too.
You may use the blog to ask questions (through comments) and make comments.
All the best
Ramakrishnan
In order to enable to you to access the teaching material that I use during the CSR course at INDSEARCH, I thought I will start this blog. This is available to those students who attend the classes. Let me try to put in whatever I teach in this blog serially. That will be useful to you during examinations too.
You may use the blog to ask questions (through comments) and make comments.
All the best
Ramakrishnan
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