10
Ethical Challenges in Business1
David T. Hopper
For some time, Fortune magazine, the well-known American business publication, has issued a list of the most admired companies in the US, a list that is eagerly anticipated and widely read every year. In 2005, the 10 most admired companies in the US included Dell, General Electric, Starbucks, Wal-Mart, Southwest Airlines, FedEx, Berkshire Hathaway, Microsoft, Johnson & Johnson, and Procter & Gamble. I note that most of these companies either have operations in India, or as we recently have learned about Wal-Mart, plan to have operations here.
In addition to being the most admired, if you go to their Web sites, you will see that these companies have something in common that immediately jumps out. They all have a section, a very visible section, on their Web pages that covers social or environmental issues. If you go, for example, to Starbucks, they still have a section where they are trying to raise funds for relief efforts in Southeast Asia. If you go to Southwest Airlines’ Web page, you will find ‘Operation Hope’. If you go to the Web site of Microsoft, you will have information about their engagement with educational institutions. And if you look at Johnson & Johnson's page, you will see a link to what they call their credo, with some of the actions they intend to take based on those principles.
Why is this happening? One might ask. Why are some of the most admired companies in the world and some of the biggest names in the business taking into consideration and paying so much attention to social and environmental issues?
If you go back to the 1970s and 1980s, some economists were saying that it actually was a waste of time, a waste of money and waste of resources, and in fact, it could be irresponsible to pay such attention. The argument was that businesses exist to deliver products to clients and to make money for shareholders. And that if a company utilizes its shareholder resources to do something else other than its business, perhaps it is not being a responsible manager. That was the dominant view at that time.
Why has it changed? Is it a fad that will go away, or is this something more profound? There are several things happening. One is that virtually every nongovernmental organization (NGO) in the world, every aid organization in the world and every international institution has made it very clear that some of the biggest problems and the biggest issues facing the world cannot be tackled without participation from the private sector. Indeed, most of the solutions are in the hands of the private sector. However, that alone does not explain that companies would actually take the lead. Just because the NGOs expect businesses to do something, that does not mean that businesses are going to do it.
So, there must be something more. One thing is that customers have more power than ever before. The Internet has empowered customers to self-organize, to find one another, to boycott products, to put pressure on suppliers when they are not receiving the products they want, or when the companies that they are buying from actually behave in ways they do not agree with.
A further phenomenon is that investors are putting pressure, increasing pressure on companies. When one looks at the numbers, the percentage of money that is invested through socially responsible funds is still relatively small, but the rates of growth are huge. All the big pension funds are now under big pressure from their stakeholders to have strong principles of governance and the like. So, that is also adding some pressure.
But all that is not enough. Although these and other pressures may incline some companies to be socially responsible, a major force behind all these is the ideas of growing, and developing global brands and a global reputation.
In the last few years, we have seen how some of the strongest brands in the world like Arthur Andersen, the number one accounting and tax firm in the world, virtually vanished within months because of a mishap that happened in one of their practices with a client in the US. Building a global brand brings with it vulnerabilities. If you have a global brand, something wrong that happens in one part of the world can upset your operations all over the world.
The companies that are really battling in the global field, that are trying to take their products to all over the world, have been extremely sensitive to their social role. And now, even in management schools and research institutions, there is talk about social strategy. The leading companies not only have a business strategy—how they are going to position their product, how they are going to sell it—they also have a social strategy because brands are built not only around the quality of the product, brands are also built around emotions, around values that people ascribe to those products. When one sees, for example, Starbucks offering coffee from free trade suppliers or offering coffee from sustainable development coffee fields, that is not just a nice, added thing to their operation, it has become a core part of what they do.
I do not wish to overstate the case. One of the things we can be sure of is that companies are not charities. Companies do not exist to take the shareholders’ money and turn it over to charities and good causes. Companies do things that are actually good business for them.
For companies to find good business in socially responsible actions, several conditions need to be met. One of these conditions is that whatever those companies do in the social realm should be related to their core business. It is not just throwing money at good causes. It is actually utilizing what the companies are good at. It is Microsoft providing free software to schools, or a food company utilizing sustainable agricultural techniques, or a supply company or a transportation company applying their logistics to take food to those who need it—it is really something that takes advantage of the core skills and competencies of the companies.
The second condition for this type of social behaviour to make sense is that whatever the company does should help to create a more competitive environment. In other words, it is an action that is going to allow the company in the future to do better business. So, it makes sense that the company uses some resources from its shareholders to undertake the social behaviour because it is going to create a more competitive, a better environment for the company to do its business. Here is an example: the next billion personal computers are not going to be sold in the US and Western Europe. The next billion personal computers will be sold in the developing world. That is where the growth is. That is where the volume is. And if companies actually become active players in helping the development of those communities, helping to create a big middle class, they are the first ones who are going to profit from this.
The third condition that companies have to take into consideration when they engage in the social realm is that it is not purely a management directive; it is not only top-down. It needs to be something that is central to the company, that engages the organization, that permeates through the organization, and really makes employees feel part of it. That is the only way that really makes the engagement a believable proposition for a company.
In summary, corporate social responsibility (CSR) is not a fad. There are structural reasons why CSR is happening and is happening so widely. I find it encouraging to think that CSR is sustainable because not only is it good for the well-being of people and societies around the world, but it also makes good business sense.
As I represent a government, I wish to add a few words about the role governments can play. Governments play a huge role by setting the rules, and by dictating what is acceptable and not acceptable. Bribery and corruption are examples of evils that are rampant in some places and which have enormous negative consequences. Indeed, the World Bank has declared ‘corruption as the single greatest obstacle to economic and social development.’ American companies used to be part of this problem. In 1977, the US Congress acted by passing the Foreign Corrupt Practices Act to bring a halt to the practice of bribery. In 2004, President Bush issued a presidential proclamation providing specific legal authority to bar from the US foreigners who are involved in public corruption, and in 2006, the US implemented a national strategy to internationalize efforts against kleptocracy.
As the world has globalized, the techniques to deal with bribery and corruption need to change to keep pace. The European Union, the Organization of American States and the Asia-Pacific Economic Cooperation (APEC) all have taken steps. The UN Convention against Corruption entered into force in December 2005. All of these are positive developments.
Tax policy also can create incentives for CSR. Governments also can encourage CSR. My department, the American equivalent of your Ministry of External Affairs, presents annual awards to American companies for outstanding CSR. I am pleased to be able to mention that last year, one of the finalists in the competition was Ford Motors India, based here in Chennai, for its support for tsunami relief and its engagement with community organizations.