Corporate social responsibility is vital for business survival

Over the past decade or so, the concept known as corporate social responsibility (CSR) has developed from a fringe interest associated with companies with particular links to the environment into a mainstream business activity adopted by household names the world over. With much of that world now in recession, the coming years will demonstrate whether CSR really has been embraced by corporations or whether it is – as some say – simply a marketing wheeze designed to put a positive gloss on their operations.

Stephen Howard is chief executive of Business in the Community, a body of 850 companies that says it “mobilises business for good”. He counters accusations that CSR will fall by the wayside in challenging times by insisting that the current economic crisis makes being a responsible business “more important than ever”. Perhaps conscious of the prominent role played by bankers in the organisation’s activities in past years, he points to how his organisation’s company of the year for 2008 – Co-operative Financial Services, part of the Co-operative Group, which has operated according to responsible principles for generations – is in a great position to gain from the crisis in the financial services industry because of the trust held in it. The organisation’s merger with Britannia Building Society (announced in January) creates a large mutual organisation untainted by the troubles experienced by most of the other banks.

Nor is he alone in believing |that CSR’s time has come. Ban |Ki-moon, Secretary General of the United Nations, told business leaders gathered at the World Economic Forum in Davos, Switzerland, in January that they needed to embrace “global co-operation and partnership on a scale never before seen” and should abandon short-term thinking in favour of long-term solutions to climate change and other pressing global challenges. The UN’s Global Compact aims to make this a reality by setting out 10 principles through which companies all over the world should tackle such issues as human rights, labour, the environment and corruption.

Meanwhile, the European Commission’s Vice President, Günter Verheugen, said at the February launch of the commission’s latest European Competitiveness Report: “Socially responsible enterprises will find themselves in a better position than others, since they can rely on a lot of strengths, including their dedicated workforce. Our report demonstrates that CSR is good in good times, but an undeniable must to cope with bad times.”

Corporate social responsibility – also referred to, increasingly, as “sustainability” – has been around for some time. For example, the cereal company Kellogg’s has had a commitment to the community since it started in the US in the early 1900s, while the chocolate-maker Cadbury began in the previous century with clear philanthropic ideals. More recently, companies such as the US outdoor clothing company Patagonia and the UK-based beauty products company The Body Shop have been as much about the causes they support and the way they do business as about their actual products.

But the notion really began to take off in the early 1990s as increasing concern about the environment – especially climate change – led to the development of environmental reporting. This was encouraged by such initiatives as an annual competition for the best environmental report organised by the accountancy body ACCA, which encouraged companies to report on what they were doing to manage their environmental impact. The programme continues to this day as “Awards for Sustainable Reporting”. At the same time, consultants led by John Elkington of Sustainability proposed that companies should cease to focus just on the financial aspects of their business and should also report on their environmental and social performance – the “Triple Bottom Line”.

Among the early advocates of, first, environmental reporting |and, then, social and sustainable reporting was the telecommunications company BT. Janet Blake is head of CSR in the company’s global services division, which deals with large corporate and government customers around the world. She dismisses ideas that CSR is about charity or philanthropy. “Good CSR is about maximising a company’s positive impact on society while at the same time maximising returns,” she says. As evidence of how this works, she says that BT’s commitment to the sustainability agenda has helped it win £2.2bn worth of business in the financial year 2007-2008, up from £1.8bn the year before.

The energy groups Shell and BP have also been setting out their credentials in this area for some time. But they have sometimes been undermined by events. Shell attracted much criticism in the mid-1990s over its proposal to dump a disused oil platform, Brent Spar, deep in the ocean, while BP – which at one point rebranded itself as “Beyond Petroleum” – was accused of not spending enough money to prevent oil spills such as that which occurred on Alaska’s North Slope in 2005.

Fear of being found wanting after setting themselves up as being ethically conducted may have deterred some companies from adopting responsible business principles. Another deterrent may have been the difficulty of demonstrating the value of such principles. Businesses have tended to see making the maximum amount of money and doing good as mutually exclusive alternatives. However, recent research has produced hard evidence to show that responsible businesses can still succeed according to traditional criteria.

Business in the Community has carried out research that shows that companies consistently running their business according to responsible principles outperformed the FTSE 350 on total shareholder return between 2002 and 2007 by between 3.3 per cent and 7.7 per cent per year. Businesses have also pointed to improvements in their reputations as a result of having been seen to do “good things”. Customers trust them, while staff feel good about their work, goes the thinking. This in turn can have a direct influence on the balance sheet. No wonder both FTSE and Dow Jones operate stock market indices that rank businesses according to various responsible business criteria.

Many CSR initiatives have also been a response to growing pressure from environmental groups and other non-governmental organisations and to the development of the concept of companies having various groups of “stakeholders” rather than just shareholders. This helps to explain the rise in the number of utility and mining groups paying attention to responsible business principles. It was only by engaging with these stakeholders – who include employees, customers, suppliers and the wider community – that such companies could acquire a “licence to operate”.

This is a controversial area. Many observers believe it is not |the business of business to become involved in society. They follow |the late economist Milton Friedman, who said that the only social responsibility of business was to maximise profits so long as it was operating within the law. Others, such as Robert Reich, the former US Labor Secretary, argue that there are dangers to democracy in business becoming too closely involved in activities that should be the preserve of governments. But such criticisms have not put off Bill Gates, founder of Microsoft and now a major philanthropist, who at last year’s World Economic Forum launched his idea of “creative capitalism” as “a way to make the aspects of capitalism that serve wealthier people serve poorer people as well.”

The immediate effect of the recession is that companies are likely to concentrate most on the aspects of CSR that help them as much as they help society. In other words, there is likely to be a focus on climate change, since a commitment to reducing a company’s carbon footprint not only looks worthy but can aid the bottom line (because it usually involves reducing waste).

But there is also a business argument for measures that boost developing economies – which are, after all, potentially developing markets as well. Communications experts believe that new technology

could offer many such boosts – as the rest of this supplement shows – and crises have always been catalysts for innovation.

It is unlikely that there will be a return to the time when governments were seen as having all the answers to society’s problems. But there will always be a place for business solutions. Already, CSR is being increasingly emphasised in business schools (whose previous emphasis on maximising profits has been blamed by some for our current problems). So we can expect to see plenty of fresh approaches to CSR.

One development, already under way, is the social business – an enterprise set up specifically to deal with certain issues. Examples include People Tree, a fashion company that sells distinctive garments in British and Japanese high streets through forging sustainable partnerships with Fair Trade and organic producers in developing countries; and Divine Chocolate, which gives cocoa farmers in Ghana direct access to the mainstream chocolate market in the UK and elsewhere.

The outlook for both businesses seems healthy. And, as Sophi Tranchell, managing director of Divine, says: “The present situation has shown us that the purely profit-motivated business model hasn’t worked. It never worked for the poor and excluded, but now it can’t even survive on its own terms. It has over-borrowed and over-promised and finally the bubble has burst.”