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Business and Human Rights in a Time of Change (Christopher L. Avery, Nov. 1999)
1. Changes in business thinking
1.1 Re-examining the fundamental purposes of business
In 1970 Milton Friedman wrote that "the one and only social responsibility of business" is to increase its profits. While there are still remnants of that thinking around, a growing number of business leaders see the equation as more complex: they consider that making money for shareholders is necessary, but not sufficient. For example:
i) Jack Welch, Chairman and Chief Executive Officer (CEO), General Electric Company: "I've always believed that the greatest contribution a business could make to society was its own success, which is a fountainhead of jobs, taxes, and spending in the community. I still believe that - but I don't think that is enough anymore. And I don't believe that even generous financial philanthropy on top of that prosperity is enough. …[T]hese times…will not allow companies to remain aloof and prosperous while the surrounding communities decline and decay."
ii) Ratan Tata, Chairman, Tata Industries: "We would like to make sure that community development is…treated as something as important as any other operation of the Tata group."
iii) the late JRD Tata, Chairman of Tata Sons from 1938 to 1991: "We in the Tatas, have long recognised that the responsibilities and obligations of our industrial enterprise transcend the normal ones to its owners, its employees, and to the customers of its products and services, and that they should encompass the welfare of, and service to, the local community and society as a whole…."
iv) Michael R. Bonsignore, CEO, Honeywell: "As we move into the twenty-first century, it is increasingly clear that the key elements of social responsibility - especially how we support our workers, their lives, and communities - will be key elements in a company's productivity and competitiveness."
v) Kenneth Mason, President, Quaker Oats: "Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life's purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit….[We should] encourage, not evade, discussion of those problems that arise when the activities of business conflict with the needs and concerns of society."
vi) Gerald M. Levin, chairman and CEO, Time Warner Inc: "Our position as the world's leading media and entertainment company could not have been reached - and could not have been sustained - solely from business success. It rests equally on our tradition of social responsibility and community involvement. At the core of this enterprise is the determination to make a difference as well as a profit."
vii) Sir John Browne, Group Chief Executive, BP Amoco: "We're part of society and we have some responsibility to contribute to its positive development. That covers issues such as human rights and employment and, for my industry in particular, the question of global warming."
viii) George Soros, President of Soros Fund Management, Chief Investment Advisor to Quantum Fund, Founder of Open Society Institute: "The doctrine of laissez-faire capitalism holds that the common good is best served by the uninhibited pursuit of self-interest. Unless it is tempered by the recognition of a common interest…, [our democratic open society] is liable to break down."
The "Tomorrow's Company" Inquiry, headed by Sir Anthony Cleaver (then Chairman of IBM U.K.), made the following observation in its 1995 report: "The companies which will sustain competitive success in the future are those which focus less exclusively on financial measures of success - and instead include all their stakeholder relationships, and a broader range of measurements, in the way they think and talk about their purpose and performance." Sir Anthony Cleaver remarked about the report: "We have tackled the sterile debate over shareholder versus stakeholder head on. We believe that only by giving due weight to the interests of all key stakeholders can shareholders' continuing value be assured." The "Tomorrow's Company" Inquiry, which brought together senior executives from 25 of the top businesses in the United Kingdom (U.K.), had the following aim: "to stimulate greater competitive performance by encouraging UK business leaders and those who influence their decision-making to re-examine the sources of sustainable business success." The inquiry's report includes this conclusion:
TOMORROW'S COMPANY recognises its interdependence with the community in which it operates. It develops leadership strategies which strengthen both the climate for business success and the community itself.
YESTERDAY'S COMPANIES stick to an insular view. They see the communities in which they operate as either a neutral factor in their success or a potential source of interference to be resisted.
The inquiry also reached the following conclusion relating to business and the environment (which today also applies to business and human rights):
TOMORROW'S COMPANY recognises the critical importance of achieving environmental sustainability in the interests of all stakeholders and accepts the challenge this poses.
YESTERDAY'S COMPANIES view environmental concerns as peripheral and react defensively when issues arise.
Mark Goyder, director of the London-based Centre for Tomorrow's Company (an independent organisation which grew out of the "Tomorrow's Company" inquiry), remarked recently: "The old idea - which is still prevalent on Wall Street - is that companies which talk a lot about stakeholders and accountability are actually betraying their shareholders. I'd say that's a 20th century view of the 21st century problem." He says that to succeed in the next century companies need to build long-term trust with shareholders and stakeholders by reporting on their progress on human rights issues.
Columbia University's Graduate School of Business now offers a seminar on "Transnational Business Practices and International Human Rights." Harvard Business School and INSEAD have introductory courses on the purpose of business, including coverage of social issues such as human rights. The Asian Institute of Management (Manila), selected by Asian Business magazine as one of the five best business schools worldwide, has made "development management" one of its full-fledged business degrees. Its Center for Development Management trains students to combine hard-nosed management skills with a commitment to addressing issues such as sustainable development, poverty alleviation, health, education and the environment.
Royal Dutch/Shell, in its recently-revised Statement of General Business Principles, says Shell companies recognise five areas of responsibility "seen as inseparable": to shareholders; to customers; to employees; to those with whom they do business; and to society. Shell's 1999 social report says:
We must take economic, environmental and social considerations into account in everything we do. We will embrace the concept of sustainable development in our business decisions, large and small. In this way we will continue to create value for our shareholders and society, while being responsive to society's changing expectations. We will evaluate the economic, environmental and social impact of our options and strive to get the balance right in our decisions. This will mean that some business decisions will be made differently and some may have different outcomes from the past.
Shell's social report goes on to say:
Why bother producing a report on our contribution to sustainable development when the Group is under such harsh financial pressure? Should we not put all our efforts and resources into ensuring a profitable future? This, we believe, is exactly what we are doing. Our values, Business Principles, commitment to contribute to a sustainable form of development - and the candid reporting of our performance in those areas - are inextricably linked to our long-term commercial success. Sustainable development builds the platform on which business thrives and society prospers.
It is becoming mainstream to talk about the responsibilities companies have to stakeholders and communities. In March 1999 Business Week magazine announced a forthcoming special advertising section entitled "The Next Bottom Line: Agenda for the 21st Century":
Solving social and environmental challenges is no longer optional for companies or society. These global challenges demand ingenuity and resolute efforts to sustain economic progress while preserving the vitality of our communities and the integrity of the Earth's natural systems. Business Week and World Resources Institute (WRI) are proud to announce a definitive special advertising section, The Next Bottom Line. The section will feature essays by CEOs of major corporations and insightful articles by WRI addressing how business can balance new social, environmental, and financial expectations and still provide shareholder/stakeholder value.
The Business Week special advertising section, which appeared in May 1999, included contributions about social and environmental issues by the CEOs of AT&T, BP Amoco (on 31 December 1998 BP and Amoco merged), Intel, General Motors, DuPont, Storebrand ASA, Mitsubishi Electric, Weyerhauser, ITT Fluid Technology, and Siemens Westinghouse Power. C. Michael Armstrong, Chairman and CEO of AT&T, wrote: "AT&T understands the need for a global alliance of business, society and the environment. In the 21st century, the world won't tolerate businesses that don't take that partnership seriously, but it will eventually reward companies that do."
In the Business Week special section's introduction, Jonathan Lash (President, World Resources Institute) wrote:
The social challenge reflects the fact that as the private sector has grown in power and importance, so have the expectations of a diverse group of stakeholders. Stockholders, customers, employees, local communities, and the variety of interest groups that comprise civil society may all have different priorities. With increased visibility for corporate behavior and increased vulnerability for companies that run afoul of today's volatile public opinion, no company can afford to neglect its relationships with its stakeholders or escape the need to be part of building a better society….
These are daunting challenges. But those companies that can simultaneously manage and anticipate new technologies, environmental uncertainties, and stakeholder expectations - that make these challenges central to their corporate strategy - will gain a powerful advantage in the new century. And the social and environmental payoff from companies that manage to this new set of criteria, the Next Bottom Line, could be huge.
The fact that the Business Week initiative took the form of an advertising section begs the question: Is there a real change of thinking in the corporate world that affects day-to-day decision-making, or is it more of a public relations exercise aimed at creating the perception of a more socially-engaged private sector? The answer is probably a mix of the two, with some companies giving higher priority than others to implementing real change in their operations. In any event, more and more company executives are going on the record with a commitment to address social issues, and their company's social performance can now be measured against that commitment as well as against other standards.
Companies - both those which have made a public commitment to social responsibility and those which have not yet done so - need to be asked hard questions, for example:
a) Are you operating in countries or in "export processing zones" where the internationally-recognised rights of workers are not being respected in an effort to maintain a compliant and inexpensive workforce? What action are you taking?
b) Are you certain that the supplies you buy in China are not being produced by forced prison labour?
c) How are you using your influence to promote human rights?
d) Are you engaged in partnerships with local human rights and development organisations to promote the rule of law and sustainable development?
Too often companies presume that their shareholders have no interest other than short-term profit. Most shareholders are long-term investors who want to invest in responsible companies with the sort of reputation that helps to ensure a sustained record of success. Dayton Hudson, a large, successful retail company in the United States (U.S.), for decades has been one of the most generous companies in the country in terms of its philanthropy. For 53 years Dayton Hudson's commitment has been to donate 5% of its pre-tax profits to community programmes (thereby giving $57 million in 1998, over $1 million per week), including to "social action programs that assist people in reaching economic independence." Few if any large companies in the U.S. donate a higher percentage. In 1982-83 Dayton Hudson commissioned a survey of its stockholders to see how they felt about the company's very high level of community giving. Of the 561 shareholders surveyed, 31% supported increasing the level of giving, 42% supported continuing at the same level, and 5% supported a cutback.
John Elkington, Chairman of SustainAbility (a London-based consultancy) and author of The Green Consumer Guide and The Green Capitalists, urges companies to integrate into their thinking a "triple bottom line" to which they are already being held to account: economic prosperity, environmental quality, and social justice. He notes:
[W]e are seeing a profound values shift in countries around the world….And a key dimension of this shift is the way in which what would once have been seen as "soft" values (such as concern for future generations) are now coming in alongside - and sometimes overriding - traditional "hard" values (such as the paramount importance of the financial bottom line).
Peter Drucker says the private sector greed we saw in the 1980s where "maximise shareholder value" was the mantra will not work anymore. His view is that just focusing on this year's bottom line forces a corporation to be managed for the shortest term, which leads to a decline in the long-term wealth-producing capacity of business. "Long-term results cannot be achieved by piling short-term results on short-term results." Drucker recognises that economic performance is the first responsibility of business, but he says it is not the only responsibility. "Power must always be balanced by responsibility; otherwise it becomes tyranny. Without responsibility, power…always degenerates into non-performance." Drucker concludes that political and social theory since Plato and Aristotle focused on power, but in post-capitalist society the focus will be on responsibility.
1.2 Challenging traditional business thinking about human rights
Much of the business community has traditionally argued that human rights do not need to be a priority for developing countries (and that companies operating or investing in countries with repressive governments should not be challenged). The substantive merits of this argument are showing strain. For example:
(a) Many in the business sector traditionally argued that it is acceptable for governments of developing countries to give a low priority to civil and political rights while focusing on economic development. Their theory: respect for civil and political rights will naturally follow later, after trade and investment create a middle class and induce political liberalisation.
That argument ignores the internationally-recognised principle that economic rights and civil/political rights are universal, interdependent and indivisible. It ignores the fact that the U.N. Declaration on the Right to Development affirms: "All human rights and fundamental freedoms are indivisible and interdependent; equal attention and urgent consideration should be given to the implementation, promotion and protection of civil, political, economic, social and cultural rights." It ignores The Vienna Declaration, adopted by consensus by the 171 governments at the 1993 U.N. World Conference on Human Rights, which states: "While development facilitates the enjoyment of all human rights, the lack of development may not be invoked to justify the abridgement of internationally recognized human rights." Nevertheless in the past business people regularly made that traditional argument (often in relation to Asia), and authoritarian governments welcomed the support.
Given recent events in Indonesia and other Asian countries, that argument is heard less often these days. Kim Dae Jung, democratically-elected President of South Korea, certainly sees things differently: "I think Asia's economic crisis stems mainly from a lack of democracy….If we develop both democracy and a market economy, we can expect successful results in the near future."
Amartya Sen, recipient of the 1998 Nobel Prize for Economics, professor emeritus at Harvard University, and Master of Trinity College at Cambridge University, wrote in 1999:
Some ask: "Is freedom of political participation and dissent conducive to development?" This way of posing the question is seriously misleading. It misses the important point that the substantive freedoms of political participation and dissent are among the constituent components of development. Their relevance to development does not have to be freshly established through their indirect contribution to the GNP or to the promotion of industrialization; they are part and parcel of what enriches human life.
As it happens, in fact, the often-repeated claim that the denial of political liberty and civil rights helps to stimulate economic growth is not confirmed by the extensive empirical information that is now available on this subject. There is little evidence that authoritarian politics contribute to economic growth, and there are many indications that economic growth is more a matter of a friendly economic climate than a harsh political system. Furthermore, economic development has other dimensions. Economic insecurity can more easily survive under authoritarian governments, which deny democratic rights and do not have to face multiparty elections, uncensored news reporting, or open public criticism. It is thus not surprising that no famine has ever taken place in a functioning democracy (even very poor ones).
In fact, the argument has a much more extensive reach than the connection between democracy and famine prevention. Protection of the destitute created by sudden economic change (caused by financial or other crises) is also far too sluggish when the protective power of democracy has been given little chance to flourish. The East Asian crises provide ample examples of this.
Freedom is not only the primary end of development, it is also one of its principal means. In addition to acknowledging the foundationally evaluative importance of freedom, we also have to understand the empirical connection that links freedoms with each other. Political freedom (in the form of freedom of speech and elections) helps to promote economic security. Social opportunities (such as education and health facilities) contribute to individual freedom and communal prosperity. Economic prospects (like opportunities for participation in trade and production) can help to generate personal abundance as well as public resources for social facilities. All of these freedoms strengthen each other.
A study of 123 countries for the period 1985 to 1994 suggested that there is no meaningful statistical correlation between increases in foreign direct investment and improvements in a country's human rights performance. Another study, by the Organization for Economic Co-operation and Development (OECD), found no convincing causal connection between trade liberalisation and respect for freedom of association rights. In fact the OECD study found that a country's desire to increase trade and direct foreign investment could lead to a deterioration rather than an improvement in human rights: "[T]here [was] evidence that some governments felt that restricting certain core labour standards would help attract inward FDI [foreign direct investment]." In some countries foreign direct investment has been seen as a factor in reinforcing a government and insulating it from calls for democratisation.
A recent article argued that unless a process of economic liberalisation incorporates human rights considerations from the beginning, it will lead to "a race to the bottom" and exacerbate human rights abuses:
To the extent that the transnationalization of investment has engendered a global chase for the cheapest labor markets, international investment practices inevitably drive down wage levels as developing countries compete for foreign investment. In this setting, it has become increasingly difficult to persuade governments of developing countries to respect internationally-recognized labor rights, particularly the right to receive a wage that meets the "basic human needs" of workers…In the longer term, this phenomenon has in many developing countries apparently retarded further expansion of the middle class, and instead has widened the economic gap between laborers and the management class. Against this background, it is increasingly difficult to assume that investment in and of itself will promote expansion of a middle class, thereby enlarging the number of citizens who enjoy economic and social rights and simultaneously making it more likely that citizens will insist upon personal and political freedoms. In this respect too, then, whether foreign investment promotes human rights depends - in this instance, on whether the foreign investor assures adequate conditions of work, including fair wages.
Amnesty International said in a 1996 publication about China: "The government says the right to subsistence and development is paramount for the Chinese people. But the need to feed the hungry can never justify torture, and there is no evidence that denying people such a fundamental right as freedom of speech improves their economic well-being."
(b) Another argument often put forward by business is that investment and trade with a repressive government should be encouraged because withdrawal by international business or sanctions hurt the people and deprive the country of the liberalising influence of engagement with the outside world.
While business people and others continue to make this case, their persuasiveness is strained when people with the moral authority of Nobel laureates Archbishop Desmond Tutu and Aung San Suu Kyi argue just the opposite.
Desmond Tutu stated during South Africa's apartheid era:
I have no hope of real change from this government unless they are forced. We face a catastrophe in this land, and only the action of the international community can save us….I call upon the international community to apply punitive sanctions against this government to help us establish a new South Africa - non-racial, democratic, participatory and just. This is a non-violent strategy to help us do so….
You hear so many extraordinary arguments. Sanctions don't work. Sanctions hurt those most of all whom you want to help. That is interesting. I haven't heard similar arguments brought forward in the United States when sanctions are applied at the drop of a hat against Panama, Nicaragua, Libya, Poland. I have to say that I find this new upsurge of altruism from those who suddenly discover they feel sorry for blacks very touching, though it's strange coming from those who have benefited from cheap black labour for many years. Spare us your crocodile tears, for your massive profits have been gained on the basis of black suffering and misery.
Aung San Suu Kyi made the following statements in recent years:
If material betterment…is sought in ways that wound the human spirit, it can in the long run only lead to greater human suffering. The vast possibilities that a market economy can open up to developing countries can be realized only if economic reforms are undertaken within a framework that recognizes human needs.
There are those who claim that the people of Burma are suffering as a consequence of sanctions, but that is not true. We want investment to be at the right time - when the benefits will go to the people of Burma, not just to a small, select elite connected to the government.
Burton Levin, a former U.S. Ambassador to Burma, agreed with Aung San Suu Kyi's conclusion about sanctions: "Foreign investment in most countries acts as a catalyst to promote change, but the Burmese regime is so single-minded that whatever [income] they might obtain from foreign sources they pour straight into the army while the rest of the country is collapsing."
Craig Forcese is a Canadian law professor, an expert on business and human rights, and Project Manager for the Business and Human Rights Project of the Canadian Lawyers Association for International Human Rights. He cites four ways that a company's activities, rather than inducing political liberalisation, "may bolster the repressive capacity and the staying power of a regime which systematically violates human rights":
- The firm can produce products used by the regime that increase its repressive capacity….
- The firm can be a major source of revenue that increases a regime's repressive capacity…..
- The firm provides infrastructure in the form of roads, railways, power stations, oil refineries or the like that increases a regime's repressive capacity….
- The firm in the country may provide international credibility to an otherwise discredited regime….
The New York Times ran a lead editorial on 6 December 1998 entitled "Corporations and Conscience." It was written in the wake of revelations that General Motors and Ford apparently had helped the Nazis and even accepted medals from Hitler. The editorial includes the following comments:
In recent years companies like Nike and Unocal have embarrassed themselves with questionable overseas partnerships….[F]or the past decade American companies have cozied up to the junta in Myanmar, Afghanistan's Taliban, Central Asia's dictators, African kleptocrats and Colombia's military. American corporations argue that they can be a positive force in repressive countries. This can be true. They often pay better than local companies, and bad publicity has spurred some corporations to sponsor health clinics and other good works. But these benefits are outweighed by the political support companies lend to bad regimes. Few ever criticize their hosts' politics. Governments take their presence as an American endorsement….Unocal, which is a partner with Myanmar's Government in a gas pipeline project, is being sued in American courts for alleged use of forced labor and forced expulsion of villagers. Last week, Unocal did end its efforts to work with the Taliban on a pipeline through Afghanistan, primarily because oil prices are so low….Companies should use their tremendous power responsibly….Some regimes are so heinous that simply to continue making profits under them is reprehensible. Nazi Germany was surely one. Corporate officials are not only businessmen, they are citizens of the world.
1.3 Corporate reputation: A valuable asset
Charles Fombrun, Professor of Management at the Stern School of Business (New York University), says in his 1996 book Reputation: Realizing Value from the Corporate Image that each company's reputation is "a fragile, intangible asset" that "complements - and sometimes surpasses - the value of the more tangible material and financial assets that managers routinely worry about." He notes:
Long ignored, intangible assets are now gaining increased notice. In the last few years, those of us who study corporate strategies have begun to recognize that intangible assets may well provide companies with a more enduring source of competitive advantage than even patents and technologies….In recent years, many prominent companies…found their reputations sullied, and so called attention to the importance of protecting and defending reputational capital….This book shows that better-regarded companies build their reputations by developing practices that integrate economic and social considerations into their competitive strategies. They not only do things right - they do the right things. In so doing, they act like good citizens. They initiate policies that reflect their core values; that consider the joint welfare of investors, customers, and employees; that invoke concern for the development of local communities; and that ensure the quality and environmental soundness of their technologies, products, and services.
A recent publication by The Prince of Wales Business Leaders Forum, in collaboration with The World Bank and The United Nations Development Programme, commented on the subject of corporate reputation:
Reputation is built on a complex base of intangible attributes such as reliability, quality, honesty, trust, social and environmental responsibility and credibility - which span the whole spectrum of a company's business and support activities. Despite this, and despite the fact that many managers agree that reputation does have value, most companies still adopt a fragmented and PR-driven approach to reputation management.
There is clear evidence that a good reputation gains a company more customers, better employees, more investors, improved access to credit, and greater credibility with government….The difference between a company with ethical capital and one with an ethical deficit - perceived or real - can even determine their "licence to operate" in some emerging markets.
Sir Geoffrey Chandler, formerly a senior manager at Royal Dutch/Shell, is now Chairperson of Amnesty International's U.K. Section Business Group. He emphasises that "the reputation of companies - crucial to their acceptability and success in a critical world - will be increasingly influenced by their willingness to recognise their role" in respect of human rights. He says companies have a clear choice "to use what influence they have, or to do nothing….If they speak out they may incur the anger of government. If silent, the certain price is reputation - which is, of course, everything."
Sir John Browne, Group Chief Executive of BP Amoco, addressed the issue of reputation in terms of "trust" in his introduction to BP's 1997 Social Report:
For any company, commercial success and a highly competitive financial performance are essential. What we are learning, however, is that enduring success requires something more, and that the ability to make a constructive contribution to society and to bring positive energy to the solution of its problems is the key to the development of genuine trust and to all the opportunities which flow from that trust.
1.4 Human rights are good for business
During the period of military rule in Nigeria, Shell Nigeria's general manager reportedly stated: "For a commercial company trying to make investments, you need a stable environment. Dictatorships can give you that." Fortunately such views are heard less often these days from business people, though no doubt they have not disappeared entirely.
Thomas d'Aquino, CEO of Canada's Business Council on National Issues, articulates a different point of view about business and human rights:
Whether at the World Trade Organization, or at the OECD, or at the United Nations, an irrefutable case can be made that a universal acceptance of the rule of law, the outlawing of corrupt practices, respect for workers' rights, high health and safety standards, sensitivity to the environment, support for education and the protection and nurturing of children are not only justifiable against the criteria of morality and justice. The simple truth is that these are good for business and most business people recognize this.
Former Canadian Prime Minister Joe Clark rejects the notion that the defence of human rights will mean losing trade. He notes that many Canadian Ministers and diplomats had raised human rights issues with their trading partners without in any sense jeopardising those relationships. He says Canada's reputation for human rights is actually an asset for business.
Reebok's "Human Rights Production Standards" say: "Reebok's experience is that the incorporation of internationally recognized human rights standards into its business practice improves worker morale and results in a higher quality working environment and higher quality products."
Jaime Augusto Zobel de Ayala II, President of the Ayala Corporation (a large Filipino company involved in businesses including real estate, banking, food, and insurance) and President of the Ayala Foundation, made the following comments in a speech to Asian business people at a 1995 Conference on Corporate Citizenship (Hong Kong):
We all pay for poverty and unemployment and illiteracy. If a large percentage of society falls into a disadvantaged class, investors will find it hard to source skilled and alert workers; manufacturers will have a limited market for their products; criminality will scare away foreign investments, and internal migrants to limited areas of opportunities will strain basic services and lead to urban blight. Under these conditions, no country can move forward economically and sustain development….It therefore makes business sense for corporations to complement the efforts of government in contributing to social development.
UCLA graduate school of business Professor David Lewin and J. M. Sabater (formerly IBM Director of Corporate Community Relations) in 1989 and 1991 conducted in-depth, statistical research surveys of over 150 U.S.-based companies to determine whether there is a verifiable connection between a company's community involvement and its business performance. Details of their study and conclusions are published in an article entitled "Corporate Philanthropy and Business Performance." They concluded:
Our findings, both cross-sectional and longitudinal, indicate that there are indeed systematic linkages among community involvement, employee morale, and business performance in business enterprises. To the best of our knowledge, this is the first time that such linkages have been demonstrated empirically. Moreover, the weight of the evidence produced here indicates that community involvement is positively associated with business performance, employee morale is positively associated with business performance, and the interaction of community involvement - external involvement - with employee morale - internal involvement - is even more strongly associated with business performance than is either "involvement" measure alone.
The Lewin-Sabater study examined in detail the question of whether a company's strong community involvement led to strong business performance, or the other way around. They found that a company's financial success did tend to lead to more community involvement, but they also found that increased community involvement did help to drive a company's business performance.
A study by DePaul University Professor of Accountancy Curtis Verschoor published in 1998, examining the 500 largest U.S. public corporations, found "a statistically significant linkage" between "a management commitment to strong controls that emphasize ethical and socially responsible behavior" and "favorable corporate financial performance." Those corporations which declared a commitment to ethical behaviour towards their stakeholders or emphasised compliance with their code of conduct were found on average to perform better financially than those corporations which did not.
Harvard Business School professor Rosabeth Moss Kanter noted in 1999 that the leading companies that are using "their best people and their core skills" to develop innovative approaches to social needs realise that "social problems are economic problems, whether it is the need for a trained workforce or the search for new markets in neglected parts of cities":
They have learned that applying their energies to solving the chronic problems of the social sector powerfully stimulates their own business development. Today's better-educated children are tomorrow's knowledge workers. Lower unemployment in the inner city means higher consumption in the inner city.
Sophon Suphaphong, President of Bangchak Petroleum (a leading oil company in Thailand), observed: "The world's markets just won't buy products that are cheap and good quality if they are manufactured by countries that exploit child labour; that are dictatorial; and that destroy the environment. Eventually, business people will have no choice but to take part in the process of resolving our social problems."
In a 1998 keynote address to an International Symposium on Human Rights and Business Ethics in Bangkok, business leader Anand Panyarachun (formerly Prime Minister of Thailand, Thailand's Ambassador to the U.N., and Chairman of the Federation of Thai Industries) said:
For some time now, companies have been called on to abide by certain environmental standards. Now their human rights standards are also being called into question….In the West, human rights groups, consumers, investors and labour unions, have through various pressure points been successful in promoting human rights in corporate codes of conduct. And companies have been responding to such pressures….Those companies that get bad press about human rights violations have seen consumers boycott their products. In the long run, the bottom line suffers. I would encourage our NGOs [non-governmental organisations] to mount similar campaigns in the interest of protecting human rights in Thailand.
Marjorie Kelly, editor of Business Ethics magazine, observed recently:
We're going through a mind-change. Most of us still carry around the subliminal idea that ruthless behavior beats the competition and good behavior is money out of pocket. But the data shows that the traditional idea is wrong. Social responsibility makes sense in purely capitalistic terms.
Allan Willet, the founding Chairman of the Centre for Tomorrow's Company (described in section 1.1 of this report), made the following comment about a stakeholder/community oriented approach to business: "Make no mistake, this is all about wealth creation and profit. This is not a trade-off at the expense of shareholder value but a powerful way of making sustainable profits and achieving lasting value for the shareholder."
David Smith, president of the Council for Ethics in Economics, says that human rights performance has become a differentiating factor among companies. "If people don't have the confidence [that companies are] going to maintain a good image, then the share values may suffer."
Kleinwort Benson Investment Management's Paul Sheehan explains why his firm launched an investment fund focused on U.K. companies that take a stringent stakeholder approach to their businesses: "It makes sense. The companies that have clear values, invest more in training employees and put money back into the communities actually buying their products will have more success over the long term than those still caught up in a bottom-line-only culture."
Speaking to a November 1998 meeting of the American Petroleum Institute, William Cvengros, CEO of investment management company Pimco Advisors L.P., said that in judging the financial performance of companies "we don't put extra value on environmental activities or citizenship. But we usually find that those companies that are good corporate citizens and have a sound environmental program are also the best investment value."
Peter Sutherland, the former Director-General of the World Trade Organization who is now Chairman of Goldman Sachs International and Co-Chairman of BP Amoco, said:
Business finds itself having to deal in a practical way with human rights issues. This is not a matter of choice but a reality in this global environment. And getting it right is not only a matter of ethical behaviour and moral choice. Enlightened business people have realised that good business is good business. Good business is sustainable, is part of global society not at odds with it, and reflects values which are shared across the world.
Sutherland points out that it is in the interest of the business community for companies to not only address human rights issues in their own operations, but also to raise concerns about social issues with governments:
Some in business say "Why should business stand up and lecture Governments on human rights: Our business is to look after our shareholders." Well, I don't believe that business should stand up and lecture governments on human rights. But I also believe that it is part of building good sustainable businesses to help establish safe, secure, stable and peaceful societies. Business thrives where society thrives. We don't have to look far for an example of this. Look at the investment confidence in Northern Ireland during the first cease-fire and after that cease-fire broke down. It is appropriate for companies to point out to governments the impact of social or environmental policies on commerce. Just as it is appropriate for companies to point out the impact of fiscal policy on commerce….In practice, this must be managed in different ways in different situations. Sometimes publicly, sometimes quietly.
Sir John Browne, Chief Executive of BP Amoco, when defining the interests of international business, says that one of the conditions for best pursuing business is operating in an open society. He recognises that this runs "directly contrary, of course, to the common belief that companies find it easier to deal with the apparent stability of repressive regimes than to manage the uncertainties of democracy. In fact, stability built on repression is always false. Sooner or later the waters break the dam." Chris Gibson-Smith, BP Amoco's Managing Director responsible for its policies, observes: "As human rights has risen on the corporate agenda, multinational businesses are realising that the successful company of the 21st century will be one that can manage its social and environmental performance as effectively as its business one."
Business for Social Responsibility, an alliance of U.S.-based corporations described in section 3.1 of this report, includes on its website the following statement about the "business importance" of human rights (a brief explanation of each point in the list is provided on the website):
As the expectations of companies regarding human rights have increased, so too has awareness of the business value of developing and implementing policies and practices to ensure compliance with human rights. Companies that have adopted corporate codes of conduct or other human rights principles and that have taken effective steps to enforce these policies have reaped the following benefits:
- Enhanced Compliance with Local and International Laws…;
- Promoting Rule of Law…;
- Managing the Supply Chain…;
- Protecting Brand Image…;
- Enhancing Risk Management…;
- Avoiding Trade Sanctions…;
- Increasing Worker Productivity and Retention…;
- Addressing Shareholder Concerns…;
- Satisfying Consumer Concerns…;
- Building Community Goodwill…;
- Avoiding Negative Campaigns…; and
- Applying Corporate Values….
Amnesty International has noted that "the building blocks of human rights protections - the rule of law, government accountability, independence of the judiciary - are the key elements in creating a stable climate for business, as evidenced by the recent economic crisis in Asia."
1.5 The employee factor
Companies are increasingly recognising that only if they have a good reputation and social record will they be able to attract and retain the best and brightest employees.
Fortune magazine has noted that the single most reliable predictor of overall excellence in a company is the ability to attract and retain talented employees.
Lester Thurow emphasises that in this new era of knowledge-based business, "when human capital is the dominant factor of production," it is absolutely essential that a company be able to recruit and keep smart employees:
The firm's only significant asset goes home every night, is an independent decision maker as to where his skills will be employed, controls the effort that she will or will not put into the firm's activities, and cannot be owned in a world without slavery. When a firm's employees leave, the firm's unique ideas and technologies automatically go with that employee to the new employer. Unless the firm can hold on to its employees, proprietary knowledge effectively ceases to exist.
Peter Drucker notes that managing a business exclusively for shareholders alienates the new class of knowledge workers; they "will not be motivated to work to make a speculator rich." He says companies and mission statements "that express the purpose of the enterprise in financial terms fail inevitably, to create the cohesion, the dedication, the vision of the people who have to do the work so as to realize the enterprise's goal." He concludes: "'Loyalty' from now on cannot be obtained by the paycheck."
A 1995 study in the U.S. found that 84% of employees felt that a company's image in the community is important; 54% said it is very important. The Wirthlin Group, which surveyed over 2000 U.S. adults in 1993 about their opinions towards corporations, commented in 1995: "Employees prefer to work for a company that has a good reputation as a corporate citizen. A positive corporate persona enhances a company's ability to attract top talent and results in more productive, more loyal employees."
In the 1999 book When Good Companies Do Bad Things, the authors examine how allegations of corporate irresponsibility (human rights, environmental, and otherwise) have affected the companies concerned and note: "Intense reactions by employees to accusations of wrongdoing illustrates the depth of their need to feel in sync morally with their employer and their need to believe that their employer is in sync with society's norms."
Recently several multinational oil company managers mentioned to the author in informal conversations that many of the most promising university graduate engineers are now asking questions during their job interview about the company's policy on the environment and human rights, questions which did not arise often in the past.
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