Saturday, October 13, 2012

Beyond "CSR": Widening Responsibility

Companies all over the world proclaim adherence to the principles of corporate social responsibility (CSR) and/or sustainability. But what reallly is "CSR"? The brief explanation below is based largely on my experience with the OECD Guidelines for Multinational Enterprises, with governments trying to improve their investment policies, international organizations seeking to develop investment rules, and with corporations, labor unions and NGOs striving to influence the process, and is aimed more at practical usefulness than academic rigor.

The first requirement for any enterprise is compliance with applicable law. Legal requirements are compulsory, not voluntary. Laws are an expression of a society's expectations with regard to behavior. They are, though, not the only such expression. For example, society expects people not to steal. This expectation is put into practice by criminal laws prohibiting theft. By contrast, society expects people to be polite to each other, but there is normally no criminal sanction for rudeness.

Similarly, companies are expected to comply with safety law and pay their taxes, in line with societal expectaions. When companies contribute to the local community, for example by providing training beyond what is needed for their business, society welcomes what the company is doing, but would not punish it for not doing so. This kind of voluntary activity is true "CSR", an initiative taken to benefit society but which society does not compel a company to undertake.

A broader, but less familiar, term that encompasses both legal requirements and non-compulsory societal expectations is "responsible business conduct" (RBC). In other words:

RBC = Law + CSR

The distinction between legally required conduct and CSR is not always clear-cut. In many industries, there are specific regulations (think of electrical installation, where you need hard law to ensure safety) and also codes of conduct. Regulations are law. Codes of conduct are usually voluntary, though there may well be an overlap. However, breaching an element of a code of conduct in a particular situation may lead to a breach of the regulations. This is rather like the system in most countries where there is a Highway Code or Code de la Route which is voluntary, but which, if breached, may lead to criminal liability, for example if failing to give way to a pedestrian when turning a corner, even if the driver has right of way, could lead to injury and a charge of dangerous driving.

If we want to be finicky about the term "corporate social responsibility", we may question the word "corporate". Surely good business conduct should not be limited to corporates, but should extend to all business activity, including that carried out by individuals? And should we not emphasize individual responsibility over corporate responsibility, which can be an escape route for the irresponsible?

And why limit our attention to "social responsibility"? The term is quite rightly used to draw attention to the need to be responsible beyond the limits of the company itself, but surely the stakeholders within companies and beyond present-day society should also be included?

Perhaps it would be best to look at the question historically. First of all, there is the enterprise that is owned and managed by a single individual, a family, or the state. The responsibility in such an enterprise is limited to profitability. Then came the development of enterprises with shared ownership, such as a joint-stock company, with responsibility extending to include benefits for all the various owners. As the need for capital to finanace huge operations such as railroad building arose, it became necessary to issue bonds and shares. The needs of bondholders and shareholders then had to be taken into account. The eventual result was the develoment of standards of good corporate governance. Following the rise of labor movements, companies found it necessary to improve their treatment of the workforce, so core labor standards were drawn up.

So far, the widening circle of responsibility had extended only within the company, from the owner to partners, to shareholders, then to workers. More recently, the rise of consumerism and competition, has produced consumer safety standards. Public worries over environmental degradation and then forced companies to look at their impact beyond their customers to the rest of the society, i.e. everyone who breathes air and drinks water.

It sounds like we have now reached the limit of responsibility, since we are including everyone now living. But there is still another step to go. There is increasing concern today that we may be leaving a poor legacy to our children and their children, as we have depleted scarce resources, dirtied our surroundings, aggravated climate change, destroyed species and piled up debts for succeeding generations to pay off.

The widest circle therefore must include responsibility to the future.

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