Kwame Nkrumah University Business Administration Discussion

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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. 174 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- 176 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- 178 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. PAGE 1 OF 6 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 PAGE 2 OF 6 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. PAGE 3 OF 6 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 PAGE 4 OF 6 TRACY GONZALEZ PADRON 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. PAGE 5 OF 6 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. PAGE 6 OF 6 TRACY GONZALEZ PADRON
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Running head: BUSINESS ADMINISTRATION

Business Administration
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BUSINESS ADMINISTRATION

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Business Administration

The growth of businesses has been linked to the simultaneous growth of society. The
development and emergence of global markets have been as a result of the activities of small
scale and large-scale businesses in society. The need to continually provide better products and
services to customers as a business has resulted in increased innovation and the stepping up of
many companies. The role of business in the holistic development of society can, therefore, not
be understated. Corporate social responsibility has also enhanced the growth of business in their
interaction with society (Browne & Nuttall, 2013).
Role of Business in Society
Businesses have a very vital role in society. They provide goods and services that are
essential for members of society, thus making their lives easier. Further, businesses have a great
role in solving the problems that society faces, including unemployment and developing the
economic landscape of a...


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