What is the role of Business in Society? This module provides diverse perspectives through
readings and video to consider the development of social responsibility and the changing nature
of expectations in our increasingly global economy. We begin with an overview of the role of
business over the years. Then, we explore corporate social responsibility and provide a general
framework for responsible leadership. Throughout, we consider ways for making the business
case of corporate social responsibility (CSR). The assignment for this module is to submit a
written synthesis of three readings to discuss how the role of business in society has changed
over time, what are the drivers for a responsible business, and what is your role as a responsible
leader?
The specific objectives include
1. Describe the role of business in society
2. Examine corporate social responsibility
3. Explore the role and competencies of a responsible leader in business.
Why Important to know
All functional areas of a business have a role and responsibility in the social responsibility
orientation and outcomes of any organization and provide unique perspectives that can enrich the
social responsibility effort. However, the concept of corporate social responsibility evolved
formally during the past 50 years with various interpretations and theoretical perspectives. The
role of business, government and society is dynamic. Businesses must adapt to new demands of
government and society.
Managers are in an influential position that allows them to be change agents throughout their
companies. Managers may significantly influence their companies’ actions, which in turn
influences the economic sphere and society as a whole.
A responsible manager requires a set of competencies - that includes domain, methodological (or
procedural), social, and self-competencies - that is different from the set required in mainstream
management.
So, what does a responsible manager “need to know”: They should know the sustainability,
stakeholder responsibilities, and ethical issues for their function. For instance, a responsible
manager in the marketing department would need to know about new sustainable consumption
movements.
Our readings provide a number of different perspectives on the role of business in society.
Milton Freedman says the basic mission of business is to produce goods and services and that
“the business of business is business”.
Submit an INDIVIDUAL written synthesis of the three assigned articles to discuss 1) how
the role of business in society has changed over time, 2) the drivers for a responsible
business, and 3) your role as a responsible leader, to include the three specific objectives
above.
The paper should be at least two pages, integrate course material, provide sources for ideas, and
follow grammar, organization and spelling norms for professional writing.
The Social Responsibility of Business Is
to Increase Its Profits1
Milton Friedman
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
1
Published in: The New York Times Magazine, September 13, 1970. Copyright @ 1970
by The New York Times Company. Reprinted by permission of The New York Times
Syndicate, Paris, France.
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Milton Friedman
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 increase 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.
The Social Responsibility of Business Is to Increase Its Profits
175
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 tobe 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 holding 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 sim-
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Milton Friedman
ply 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 try-
The Social Responsibility of Business Is to Increase Its Profits
177
ing 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 selfinterest.
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 business-
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Milton Friedman
men 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
M A R C H 2 013
s t r a t e g y
p r a c t i c e
Beyond corporate social
responsibility: Integrated external
engagement
Companies must incorporate interaction with stakeholders into
decision making at every level of the organization.
John Browne and Robin Nuttall
2
Traditional corporate social responsibility (CSR) is failing to deliver, for both
companies and society. Executives need a new approach to engaging the external
environment. We believe that the best one is to integrate external engagement deeply into
business decision making at every level of a company. In this article, we show how to make
that kind of integrated external engagement (IEE) a reality. We set out to answer three
questions. Are companies doing well at external engagement? Where might they be going
wrong? How can they do better?
Are companies doing well at external engagement?
Properly understood, external engagement means the efforts a company makes to manage
its relationship with the external world. This relationship can and should include a wide
variety of activities: not just corporate philanthropy, community programs, and political
lobbying, but also aspects of product design, recruiting policy, and project execution. In
practice, however, most companies have relied on three tools for external engagement: a
full-time CSR team in the head office, some high-profile (but relatively cheap) initiatives,
and a glossy annual review of progress.
That traditional approach has had some positive effects. Companies certainly consider the
external environment more carefully than they did in the past, and their philanthropic
programs have helped many people. But in a majority of cases, CSR has failed to fulfill
its core purpose—to build stronger relationships with the external world. The Occupy
movement in the United States is the most visible sign of discontent, but polls show that
levels of trust in business are below 55 percent in many countries. A significant minority
views business executives as villains, enriching themselves at the expense of society. Even
firms with the glossiest CSR reports have found themselves cast as public enemies. Take
major Wall Street firms in the aftermath of the financial crisis or BP after the Gulf of
Mexico spill: their relationships with the external world have been shattered, and they
have lost billions of dollars of value as a result.
Many executives recognize that their current approach is inadequate. In a recent McKinsey
survey of more than 3,500 executives around the world, less than 20 percent of the
respondents reported having frequent success influencing government policy and the
outcome of regulatory decisions.1 This problem creates an opportunity for significant
competitive advantage. In marketing or operations, companies struggle to raise their
performance a few percentage points above that of their competitors. But as leading-edge
companies such as Statoil and Unilever have discovered, effective external engagement can
set you far above your rivals.
1
“Engaging and understanding governments: McKinsey Global Survey results,” mckinseyquarterly.com, January 2012.
3
Where are companies going wrong?
Executives should not blame themselves alone. One reason they struggle is that the
expectations of citizens and governments have never been higher. Companies are expected
not only to obey the law or meet certain standards within their own businesses but also
to ensure high standards across their supply chains. Large companies are expected to
go further still, helping to solve major economic, environmental, and social problems—
even those unrelated to their businesses. Moreover, as the expectations of citizens have
increased, so has their power to scrutinize. Digital communication has enabled individuals
and nongovernmental organizations (NGOs) to observe almost every activity of a business,
to rally support against it, and to launch powerful global campaigns very quickly at almost
zero cost. High expectations and scrutiny are here to stay. Successful companies must be
equipped to deal with them.
What is wrong with CSR? Why have well-resourced teams, backed by the authority of
CEOs, failed to deliver on their core purpose? In our experience, that centralized approach
has four serious flaws.
First, head-office initiatives rarely gain the full support of the business and tend to
break down in discussions over who pays and who gets the credit. Without the active
participation of the big-spending functions—typically, production and marketing—the
ambitions of a central team are difficult to realize.
Second, centralized CSR teams can easily lose touch with reality—they tend to take too
narrow a view of the relevant external stakeholders. Managers on the ground have a much
better understanding of the local context, who really matters, and what can be delivered.
Third, CSR focuses too closely on limiting the downside. Companies often see it only as an
exercise in protecting their reputations—to get away with irresponsible behavior elsewhere.
Effective external engagement is much more than that: it can attract new customers,
motivate employees, and win over governments.
Finally, CSR programs tend to be short-lived. Because they are separate from the
commercial activity of a company, they survive on the whim of senior executives rather
than the value they deliver. These programs are therefore vulnerable when management
changes or costs are cut.
Michael Porter and Mark Kramer summarize the result: “a hodgepodge of uncoordinated
CSR and philanthropic activities disconnected from the company’s strategy that neither
make any meaningful social impact nor strengthen the firm’s long-term competitiveness.” 2
2
ichael Porter and Mark Kramer, “Strategy and society: The link between competitive advantage and corporate social
M
responsibility,” Harvard Business Review, December 2006, Volume 84, Number 12, pp. 78–92.
4
How can companies engage more profitably?
In response to this problem, a number of observers have proposed new intellectual
frameworks to analyze how businesses manage their relationships with the external world.
Almost all of these frameworks, including Porter and Kramer’s “shared value” 3 and Ian
Davis’s “social contract,” 4 share a core idea: companies must deeply integrate external
engagement into their strategy and operations.
The logic is simple and compelling. The success of a business depends on its relationships
with the external world—regulators, potential customers and staff, activists, and
legislators. Decisions made at all levels of the business, from the boardroom to the shop
floor, affect that relationship. For the business to be successful, decision making in every
division and at every level must take account of those effects. External engagement cannot
be separated from everyday business; it must be part and parcel of everyday business.
In our experience, most executives share that objective, but many do not know how to
achieve it. What can you do to integrate external considerations into decision making
across a business? To build on our own experience at BP and McKinsey, we spoke to seven
leaders who excel in this area. We conclude that you need to do four things: define what
you contribute, know your stakeholders, apply world-class management, and engage
radically. We discuss each element in turn.
Define what you contribute
“We are finding out quite rapidly that to be successful long term we have to ask: what do we
actually give to society to make it better? We’ve made it clear to the organization that it’s our
business model, starting from the top.”
—Paul Polman, CEO of Unilever
Every company makes a significant contribution to society. At the most basic level,
businesses offer goods and services people want. In the process, they provide capital, jobs,
skills, ideas, and taxes. But many companies don’t emphasize that contribution. Internally,
they focus on what they can get from society: cheaper inputs, higher prices, and kinder
regulation. Externally, they promote their tiny CSR-related contributions—vaccines they’ve
donated, say, or playgrounds they’ve built—ignoring the vast contribution made by the dayto-day business.
This focus creates two serious problems. Externally, it undermines credibility. If your
company exists to extract value from society and tacks on a few CSR initiatives to “give
3
Michael Porter and Mark Kramer, “Creating shared value,” Harvard Business Review, January–February 2011, Volume 89,
Number 1–2, pp. 62–77.
4
Ian Davis, “The biggest contract,” the Economist, May 26, 2005.
5
back,” no one will believe a word you say. Citizens, NGOs, and regulators will tend to view
your efforts to engage—even genuine ones—as cynical and selfish maneuvers. In that
climate, cooperation is very difficult. Internally, the same mind-set hinders the integration
of external engagement into daily activities. The goal, as BHP Billiton’s outgoing CEO
Marius Kloppers describes it, is for “every single employee, contractor, and supplier to take
responsibility for social issues.” That is very difficult to achieve if these parties behave as if
their relationship with the external world was essentially extractive.
Companies that succeed in building a profitable relationship with the external world
tend to think very differently: they define themselves through what they contribute. This
approach does not mean changing purpose; it means being explicit about how fulfilling
that purpose benefits society. Nor does it mean abandoning a focus on shareholder value;
it means recognizing that you generate long-term value for shareholders only by delivering
value to society as well.
That point may seem to be an intellectual or linguistic distraction, but a CEO’s vision
for a company has a powerful practical impact. Take Paul Polman, whose bold strategy
we quoted above. His approach has been formalized in the Unilever Sustainable Living
Plan (USLP), which sets a clear goal: to double the company’s sales while reducing its
environmental impact. The plan explains why that goal makes business sense, what targets
the company must hit en route, and how it will do so. Every employee can understand what
the company wants and how he or she fits into that goal. Like other companies following
similar strategies—AstraZeneca, GE, and PepsiCo, for example—Unilever hasn’t got there
yet. But with the USLP, Polman has laid the foundation for external credibility and internal
transformation.
Redefining the way a company thinks about itself requires leaders to promote their vision
again and again with unremitting energy, both internally and externally. Duke Energy’s
Keith Trent emphasizes this point: “Whether it’s the CEO or his or her senior leaders, the
biggest job is creating that vision for the company.” That involves a significant personal
risk because you have to take on incumbents who benefit from the status quo. All of the
leaders we spoke to had met with resistance from other executives, shareholders, and
competitors. Daniel Vasella, the former chairman of Novartis, puts it well: “When people
believe change will only cost them, you can be sure they will do everything to make change
fail or not even start.” Leadership requires you to put your reputation on the line and to
bring people with you. Make it clear that they can choose to engage with the world—or they
can leave.
6
Know your stakeholders
“Companies often focus on speaking about our needs and our business, trying to persuade
people about the soundness of our activities. We would be more effective if we understood
stakeholder dialogue as an exercise to listen and understand.”
—Helge Lund, CEO of Statoil
Our second maxim of integrated external engagement is to know your stakeholders. That
idea may sound obvious, but many executives do not take it seriously. Knowing your
stakeholders means more than writing down a list of risks they could pose, having a cup of
tea with some NGO heads, and holding a few focus groups. It means understanding your
stakeholders as rigorously as you understand your consumers.
The McKinsey survey found a strong correlation between the in-depth profiling of
stakeholders and success at engaging with them. Sixty-seven percent of respondents from
successful companies report that they are very effective at understanding the priorities
and objectives of the stakeholders, versus 28 percent of respondents from less successful
companies.
Effective marketing relies on a detailed knowledge of the preferences and resources of
consumers. Likewise, effective external engagement relies on a detailed knowledge of
the preferences and resources of stakeholders. That means learning, on an individual
and institutional level, what they want, when they want it, how much they are prepared
to compromise, how your activities affect their goals, and what resources and influence
they can bring to bear. Companies can gain such a detailed understanding only through
a rigorous and exhaustive process, including personal conversations with stakeholders,
expert analysis (from external sources where necessary), and specialist monitoring of the
Internet and social media. Research may sometimes take place at the corporate level—to
develop an overview of strategic social issues—but more often at the level of a single facility,
market, or project. As we discuss later, line managers must have the skills, incentives, and
resources to conduct that research.
Sometimes it takes more innovative methods to acquire the necessary knowledge. In
2002, BP began developing the vast Tangguh gas field, in West Papua, Indonesia. The area
was rife with social issues: political separatism, land disputes, human-rights abuses, and
environmental degradation. Construction required the relocation of one village to two
new resettlement sites. An independent advisory panel was established to hear community
concerns, encourage debate, examine BP’s activities, and report its findings publicly and
fully—all without influence from BP. That gave the panel’s reports credibility and gave
the company’s leadership a far greater understanding of the issues than would have been
possible if the research had been left to executives caught up in the project’s technical
challenges. BP’s approach may seem expensive and even dangerous, but it is essential, and
7
far cheaper than misunderstanding social issues, making mistakes, and being driven out
by local resistance, government decree, or international pressure. To act in ignorance is to
take a huge risk.
Thorough stakeholder research not only summarizes issues and interests as they stand
today but also identifies potential problems and opportunities before they arise. That
allows a company to act before its competitors do. Paul Polman describes how a lack
of foresight hurt Unilever: “We missed the issue of obesity and the value of healthy
and nutritional food. We were behind, while Nestlé was riding that wave. Not being in
tune with society, with the benefit of hindsight, can cost you dearly.” The closer your
relationship with stakeholders, and the greater your expertise, the more likely you are to
spot the trends that seem so obvious in hindsight.
Apply world-class management
“There are the guys and girls sitting at the top who are wrestling to ensure that in the long
term they do the right thing. Then there are the people who are asked to deliver. The
question is how do they react and behave?”
—Martin Sorrell, CEO of WPP
Companies that succeed at integrating external engagement into their businesses see it as a
critical contributor to profitability, not as some woolly qualitative activity. They manage it
like any other business function, using the three core tools of great management: creating
capabilities, establishing processes, and measuring outcomes.
Creating capabilities
Employees need the right skills to include external considerations in their decision making.
That starts at the top, as Statoil’s Helge Lund explains: “We have to have 360-degree
leaders. They have to be good businesspeople who can develop talent and build business
relationships, but they also have to genuinely understand the requirements and the
expectations of external society.” CEOs are responsible for ensuring that their senior teams
are as capable at external engagement as at internal management and that the necessary
skills are valued, promoted, and developed throughout the organization.
Companies can develop their external-engagement skills through a mixture of on-the-job
experience and formal training for employees. In many cases, particularly at senior levels,
these skills are best developed in several areas of the business—experience in marketing,
for example, equips executives to analyze and communicate with stakeholders, experience
in operations to deliver change on the ground. Formal training is a useful supplement,
particularly for more specialized skills, such as negotiation. For example, BP held master
classes with leaders such as Madeleine Albright and Henry Kissinger, people who really
know how to align diverse interests effectively. At the lower levels of the company, training
8
helps every employee and contractor to understand the importance of relationships with
the external world and to know the company’s policy on social issues.
Establishing processes
Putting capabilities in place is not enough; companies must formally incorporate external
engagement into business processes at all levels. Every process—whether it helps a
company to set corporate strategy, design products, or plan projects—must include
efforts to consider its impact on stakeholders and consequences for the business. Helge
Lund describes this approach at Statoil: “Stakeholder interests, dialogues, risks, and
opportunities are deeply integrated in every business decision that we take. Every single
project or investment decision comes with reflections, risk maps, and mitigation actions
around the particular topic that we’re discussing.”
When companies develop processes, clarity is essential: conflicting policies, standards,
guidelines, and initiatives can be counterproductive, creating overload and confusion. BHP
Billiton has worked hard to avoid all this by replacing its old forms of guidance with what
Marius Kloppers describes as “a series of group-level documents that clearly articulate
the minimum standards that must be in place at all company assets, to ensure that all
managers and employees fully understand the company’s corporate expectations.”
The risk in practice is that business lines will treat external engagement as an afterthought
and a hoop to jump through to satisfy the head office. Each recommendation in this
article—setting the vision, creating capabilities, and measuring outcomes—reduces that
risk, but ultimately it is a risk that executives must take. Only business lines have the
resources, the influence, and the knowledge to transform a company’s relationship with
the external world.
It is worth cautioning against a common error. Some companies publicize their internal
processes, holding them up as evidence for their responsibility and expecting praise in
return. Those details should remain behind the curtain: stakeholders generally care about
results and results alone.
Measuring outcomes
Results should also be the only thing executives care about. In external engagement,
perhaps more than in any other business function, it is easy to be diverted from a focus on
outcomes to a focus on processes or, even worse, an ill-defined sense of “doing good.” To
retain a focus on outcomes, companies must set targets, measure progress against them,
and link incentives to their achievement. The saying “what gets measured gets treasured”
is as true for external engagement as for any other area of business. Ideally, companies
should measure outcomes in terms of value added to the business, a challenging standard—
less than 20 percent of respondents to the McKinsey survey reported that their companies
measure the financial impact of external-affairs activities. The difficulty arises because
9
their financial benefits are often indirect and far in the future or can be quantified only
against an unobserved counterfactual.
In practice, businesses can observe various proxies, of varying degrees of accuracy, for
the value external engagement adds. The closest proxy is satisfaction among stakeholders,
weighted according to their importance to your business. Independent panels, such as
BP’s in Tangguh, are a good way to get a fair appraisal, and standard polling may be
useful in some circumstances. When it is not possible to measure stakeholder satisfaction,
a company can look at specific impacts on society and the environment. Unilever’s
Sustainable Living Plan, for example, sets about 60 targets for seven metrics, including
total water consumption and greenhouse-gas emissions. In some cases, such as political
engagement, companies cannot track the satisfaction of stakeholders or the impact on
society. The only possibility is to measure activities (such as the number of meetings with
politicians), though companies must take great care to ensure that these activities are
not undertaken for their own sake. In general, the issue in question will determine which
measures are possible and appropriate.
Engage radically
“I have an aversion against missionaries. I don’t like to go out as a missionary and
preach, and then be accused of preaching for my own parish. This is a negotiation, and
it can be a very tough one.”
—Daniel Vasella, Former chairman of Novartis
The final hallmark of integrated external engagement is a radical approach to
communication with the external world. In our experience, and the experience of the
executives we spoke to, companies must guard against three pervasive errors.
First, a lot of companies start engagement too late. The natural temptation for many busy
and cost-conscious executives is to delay acting until something hits them. That can be
fatal. Integrated external engagement requires you to sit down with stakeholders early
and often. The discussion should be ongoing, constantly building goodwill, understanding,
and connections, so that companies stay informed and establish a reserve of trust to draw
down in times of crisis. As Helge Lund puts it: “Gaining stakeholder trust is not something
that you achieve once and for all. You can lose it very quickly. We have to be continuously
working on this subject, even when we do not necessarily have big issues to deal with. It
has to be developed as part of the DNA of the company.” The McKinsey survey found
that 65 percent of executives think they should proactively engage with governments but
10
that only 38 percent actually do so. As for regulatory bodies, 63 percent of executives
acknowledge the need to engage with them but only 33 percent follow through.
The second error, alluded to by Daniel Vasella above, is to treat stakeholder engagement
as a propaganda exercise. Repeatedly saying how responsibly your company behaves
is not credible and achieves very little. Rather, engagement should be understood as a
negotiation with intelligent and often powerful operators. As in any negotiation, your
bargaining position determines your strategy and style. That’s why it is so important to
know your stakeholders and their payoffs and resources in advance. Negotiating with them
is an ongoing game, and establishing trust is therefore important. You may be able to fool a
regulator or an NGO once, but that is liable to backfire the next time you interact. In most
cases, if you are prepared to change your business in a significant way, you can achieve
mutually advantageous outcomes and thus real collaboration.
That does not mean the aim is to please everyone—the third common error. Sometimes,
a mutually advantageous solution is impossible, collaboration will not yield your best
outcome, and a stronger negotiating strategy is to attack. For example, in a dispute with
a regulator, if the law is on your side, there may be no point in seeking compromise. If
activists make ridiculous demands that will win no sympathy with the broader society, it
may be best to show them the door. As Iglo Group’s former CEO Martin Glenn puts it: “You
don’t have to manage all of your stakeholders equally. Some people who think they are
stakeholders might not be. You have to decide whether Stakeholder X is truly critical to the
long-term health of your business or not.”
Selective cooperation applies not only to stakeholders but also to competitors. When it
would be ineffective or too costly to act alone in addressing an issue, cooperation with
them may be in the best interests of all players. For example, an industry may sometimes
seek intelligent regulation to shut out free riders that undermine its reputation. But in
certain cases, the first-mover advantage is considerable, and it is best to act alone. As
Martin Glenn told us, “For big initiatives which we want to own, we’ll take a risk, and then
we will seek advantage from that.”
From CSR to IEE
A good relationship with NGOs, citizens, and governments is not some vague objective
that’s nice to achieve if possible. It is a key determinant of competitiveness, and companies
need to start treating it as one. That does not mean they have to initiate philosophical
inquiries into social responsibility and business ethics. But it does require them to
recognize that traditional CSR fails the challenge by separating external engagement
from everyday business. It also requires them to integrate external engagement deeply
11
into every part of the business by defining what they contribute to society, knowing their
stakeholders, engaging radically with them, and applying world-class management. In
other words, it requires the same discipline that companies around the world apply to
procurement, recruitment, strategy, and every other area of business. Those that have
acted already are now reaping the rewards.
John Browne, former CEO of BP, is a partner of Riverstone Holdings; Robin Nuttall is a principal in McKinsey’s London
office. Copyright © 2013 McKinsey & Company. All rights reserved.
CSR Video Lecture Transcript
Societal
Societal
Responsibility
Responsibility Expectation
Expectation
Economic
Economic
Required
Required
Examples
Examples
Be
Beprofitable.
profitable. Maximize
Maximizesales,
sales,
minimize
minimize costs,
costs,etc.
etc.
Carroll (1991) provides a framework for
understanding the corporate responsibility. We will
use this framework throughout the course.
Economic responsibility—Businesses have a
responsibility to be economically viable in order to
provide a return on investment for their owners,
Ethical
Expected
Do
Ethical
Expected
Dowhat
whatisisright,
right,fair
fair and
andjust.
just.
create jobs for the community, and contribute
goods and services to the economy.
Discretionary
Be
Discretionary Desired/
Desired/
Beaagood
goodcorporate
corporate citizen.
citizen.
Legal responsibility—Companies are required to
(Philanthropic)
(Philanthropic) Expected
Expected
obey laws and regulations passed to promote
responsible business conduct.
Ethical responsibility—Companies must decide what they consider to be just, fair, and right: the realm
of business ethics. Business ethics refers to the principles and standards that guide behavior in the world
of business.
Philanthropic responsibility—Companies can promote human welfare and goodwill by making
voluntary donations of money, time, and other resources.
Legal
Legal
Required
Required
Obey
Obeylaws
lawsand
andregulations.
regulations.
Note this this framework does not imply a progression or stage – in fact each component interacts with
each other. For example, the relationship with employees is economic (providing wages), legal
(complying with safety regulations), ethical (non-discriminatory workplace), and philanthropic
(volunteer programs).
Source: Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral management of
organizational stakeholders. Business Horizons, 34(4), 39.
Companies move along a
continuum in their approach to
CSR. IBM develop a CSR Value
Curve which captures the shift in
thinking from CSR as a cost or risk
mitigation effort to CSR as a
strategic goal that brings in new
revenues.
Governments have historically
arbitrated much of the relationship
between society and business, and
in its most rudimentary form, CSR
can be viewed as compliance with
the laws and regulations set by the
public sector. Companies with a
narrow view of CSR look at compliance as a cost of doing business – and as a source of potentially
expenses in terms of litigation and reputation. Failure to abide by local and global regulations can
destroy business reputations and brands, but compliance alone will not build brands. Nor will
compliance offer the growth opportunities that strong brands and reputations bring with them.
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TRACY GONZALEZ PADRON
CSR Video Lecture Transcript
Companies have started shifting their thinking about what it means to be socially and environmentally
responsible. The next stage on the CSR Value curve is strategic philanthropy, which is a way to align
charitable giving with business strategy, company skills and market needs.
As CSR develops as part of the company’s value system, these activities reinforce a company’s social
commitment with ongoing returns, often in the form of goodwill and indirectly from a financial
perspective.
Companies are finding that many CSR initiatives, including those that reduce energy consumption or
benefit the environment, help reduce overall cost structures or increase productivity.
When aligned with business objectives, companies are beginning to see that CSR can bring competitive
differentiation, permission to enter new
markets, and favorable positioning in the
talent wars.
Source: Porter, Michael E. and Mark R.
Kramer, "Creating Shared Value," Harvard
Business Review, 2011. 89 (1/2).
Michael Porter and Mark Kramer advocate for
shifting focus from CSR to creating shared
value. They define creating shared value as”
policies and operating practices that enhance
the competitiveness of a company while
simultaneously advancing the economic and
social conditions in the communities in which
it operates. Shared value creation focuses on
identifying and expanding the connections between societal and economic progress.”
A shared value approach to business will lead to greater innovation and growth for companies—and also
greater benefits for society.
There are three key ways that companies can create shared value opportunities:
By reconceiving products and markets
By redefining productivity in the value chain
By enabling local cluster development
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TRACY GONZALEZ PADRON
CSR Video Lecture Transcript
Source: Porter and Kramer, "Strategy
and Society: The Link between
Competitive Advantage and Corporate
Social Responsibility - Response,"
Harvard Business Review, 2007. 85(6)
Porter and Kramer admit that no
business can solve all of society’s
problems or bear the cost of doing so.
Instead, each company must select
issues that intersect with its particular
business. Other social agendas are best
left to those companies in other
industries, NGOs, or government
institutions that are better positioned to
address them.
The essential test that should guide CSR
is not whether a cause is worthy but
whether it presents an opportunity to
create shared value – that is, a meaningful benefit for society that is also valuable to the business.
They identify three types of social issues:
Generic social issues may be important to society but are neither significantly affected by the
company’s operations nor influence the company’s long-term competitiveness.
Value chain social impacts are those that are significantly affected by the company’s activities in the
ordinary course of business.
Social dimensions of competitive context are factors in the external environment that significantly
affect the underlying drivers of competitiveness in those places where the company operates.
Arguments
Arguments Against
Against
Restricts
Increase
Restricts the
the free
free
Increase business
business
market
goal
market goal of
of
power
power
profit
profit maximization
maximization Limits the ability to
Limits the ability to
Business
Business is
is not
not
compete
compete in
in aa
equipped
equipped to
to handle
handle
global
marketplace
global marketplace
social
social activities
activities
Dilutes
Dilutes the
the primary
primary
aim
aim of
of business
business
Arguments For
Addresses social issues
business caused and
allows business to be
part of the solution
Protects business selfinterest
Limits future
Addresses issues by
government
using business
intervention
resources and expertise
Provide arguments for – stressing the benefits to the business.
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TRACY GONZALEZ PADRON
CSR Video Lecture Transcript
Strategic CSR strengthens company competitiveness through 1) developing a talented workforce, 2) achieving a
reliable supply of high quality materials for production, 3) facilitating rules and incentives that govern competition,
4) increasing innovation through new products and services, and 5) providing access to new market segments
increase demand for a firm’s product and services.77
The themes relate to the recommendation of Porter and Kramer to invest in social initiatives that foster growth
and strengthen company competitiveness.
Outcomes
-Examples
Competitive Environment
Talented
workforce
Develop skilled labor pool
Reduce costs generated by
employee attraction and
turnover
Honeywell partners with the National Aeronautics
and Space Administration (NASA) in a middle school
science education program to promote future supply
of scientists, engineers and technologists
Apache Footwear reduced labor turnover by building
one-story, red-brick buildings for staff, organizing
Saturday night movies and dances, and hiring its
employees' relatives
Reliable supply
chain
Secure consistent, longterm, and sustainable
access to safe, high quality
raw materials and products
Pepsi shares its expertise about potato farming
under desert conditions with the Chinese Ministry of
Agriculture to ensure materials for snack foods
marketed in China
Favorable rules
and incentives
Reduce costs and
regulations within the
industry
Reduce local resistance to
entry in new markets
General Electric, Cinergy, and Bechtel developed
solutions to reduce coal emissions in energy plants,
meeting environmental regulations and at a lower
cost than traditional practices
Altria Group works with governments to secure fair
excise tax structures in many of its key markets
Talented workforce
Companies with an integrated social responsibility program are more likely to attract, develop, and inspire
employees. Collaborative initiatives between businesses and government in education benefit society while
providing a personnel pool for industry. For example, Honeywell partners with the National Aeronautics and Space
Administration (NASA) in a middle school science education program in anticipation of a ‘‘talented workforce of
scientists, engineers and technologists’’.79
Reliable supply chain
Strategic social responsibility focusing on the supply chain can provide for a reliable supply of products and raw
materials for production. Starbucks is known for its work with organizations to help coffee farmers to improve
their quality of life, including collaborating with farmers to implement new and sustainable farming techniques.
Pepsi shares its expertise about potato farming with the Chinese Ministry of Agriculture to ensure materials for
snack foods marketed in China. Similarly, Water is a key ingredient in beverages, resulting in strategic social
responsibility projects by Pepsi and Coca-Cola to preserve and conserve water. For example, Coca-Cola invested in
over 200 community water projects in 60 countries during 2005-2009.81 Hershey works with the World Cocoa
Foundation to ensure that cocoa is grown responsibly and to support income improvement for cocoa-growing
families.
Favorable rules and incentives
Social responsibility projects may alter the competitive environment of the firm through facilitating changes to
rules and regulations within the industry. General Electric, Cinergy, and Bechtel developed solutions to reduce coal
emissions in energy plants, meeting environmental regulations and at a lower cost than traditional practices. Altria
Group discusses their “success working with governments to secure fair excise tax structures in many of its key
markets, with numerous countries adopting minimum excise taxes and several considering the adoption of
minimum reference prices.”83
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CSR Video Lecture Transcript
Outcomes
New product &
services innovation
Growth
New markets &
customers
-Examples
Create products to meet unmet social
needs and increase differentiation
Develop cutting edge technology for
unmet social or environmental needs
Gain access to new markets
Increase demand through education
and infrastructure development
Foster brand loyalty and goodwill
Heinz partners advisory groups from around
the world to guide development of healthier
foods meeting diverse dietary needs
Ecolab developed a new washing process for
hotel and healthcare laundries using an
innovative process to conserve energy and
water
Hindustan Lever is improving health
conditions in rural India through its
education programs on hygiene while
creating demand for soap products
Cisco Systems, Hewlett Packard, and Nokia
are partner organizations in the United
Nations Information and Community
Technology task force to encourage universal
access to information technology
New product & services innovation
Companies adopting strategic approaches to social responsibility may experience improvements in products or
services through innovation. Heinz sponsors studies and symposiums with leading nutritionists, dieticians, and
physicians from around the world for bolstering nutrient content and reducing sodium and fats in ketchup, soups,
sauces, and frozen foods. Ecolab, Inc. has become a global industry leader by developing cleaning, sanitizing and
food safety products that consider the total impact on the environment, from the formulation, production,
packaging, and customer usage. An innovative hotel and healthcare laundry system recycles energy and water,
earning Ecolab an environmental award in Germany.85 Strategic approaches also result in innovative new service
offerings. For example, Allstate mentions that by working closely with state officials, they are able to provide
better insurance protection against hurricanes.
New markets & customers
Increasing demand for a firm’s product and services is another outcome of strategic social responsibility within the
computer industry. There are two general approaches to develop future demand - promoting product usage and
enabling capacity. Cisco Systems, Hewlett Packard, and Nokia are partner organizations in the United Nations
Information and Community Technology (UNICT) task force. UNICT includes actors from all societal sectors –
industry, government, and non-governmental organizations – that work to bridge the digital divide and provide
universal access to information technology.
Some projects focus on educating consumers on the use of products and services offered by the company. In rural
India, Hindustan Lever is improving health conditions through its education programs on hygiene, including waving
an ultraviolet-light wand over the hands of pilgrims seeking to bathe at in India's sacred rivers to show where
germs and dirt resided. "It's not enough for the company to look at market-share increase," says Anand Kripalu,
42, the company's head of detergents and a creative thinker behind many of the company's rural-outreach
strategies. "We want to spread the message of hygiene and really use the Lifebuoy brand to deliver that benefit to
consumers. This isn't just good for us as a brand; it's good for the country."88
Source: Gonzalez-Padron, Tracy L: Social Responsibility as a Strategy in International Business in the 21st Century,
edited by Bruce Keillor/Timothy Wilkinson, May 2011, Vol. 3, pp. 117-147. Praeger Publishers Inc., ISBN-10:
0313379483.
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TRACY GONZALEZ PADRON
CSR Video Lecture Transcript
Benefits
Greater trust with stakeholders
Greater customer satisfaction
Stronger employee commitment
Stronger investor loyalty
Greater profitability
Countries with greater trust-based institutions
foster a productivity-enhancing environment.
Competitive processes are more efficient and
effective.
The material today provide ample examples for the making the business case. The key is finding the
right message for your situation.
Key Points
CSR = The adoption by a business of a
strategic focus for fulfilling the economic,
legal, ethical and philanthropic
responsibilities expected by its stakeholders.
Business case = Use business language to
emphasize the economic benefits to business
people and human interests with social
service organizations.
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TRACY GONZALEZ PADRON
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