Nobody wants one in their back yard

Who want a two by two kilometre and 100-meter open pit mine in their back yard or for that matter several square kilometres of land, plastered with 130-meter high windmills? Well the answer is simple nobody. Local communities together with special interest groups have been good at creating media stories on how the “little” man gets brushed aside by big business and sometimes with good reason. It could seem like that business in general and multinational companies especially have been struggling with getting on the same “wavelength” as the communities where they conduct their business.

Industries like mining and big renewable energy projects are especially exposed as they involve heavy machinery, removal of vast amounts of dirt, dangerous working conditions, damage to the environment, destruction of nature and farmland. And a lot of the time all these activities translate into a massive impact on the social life of the surrounding population. So it is not strange that the locals finds it difficult to accept they should be subjected to this kind of influence. Factors like these are all well known and the companies involved have created a wide range of systems and tools in order to cope with both the positive and negative side effects of their activities.

Teghut dumpster 3

There have been mining in the world in the last 5000 years and its effect on society is well documented. Companies who are active in the industry knows that local communities are confronted with uncertainty as to what the future brings and have put in-place management systems and organised in order to confront these challenges. Sometimes these systems are to the benefit of the local population and sometimes not. Even though social risks are well known and described in numerous cases it remains the principal reason why mining projects have to close down after start of operations. In practice this means that mining companies are left to experiment and relay on the knowledge they can get when things goes wrong, either in their own back yard or when one of their competitors get in trouble. However, we are now seeing companies in other industries being confronted by some of the same risks and having the same types of difficulties handling the risks that local communities present.

Most people agree that the renewable energy sector by their very nature is working for a common global good. They help us reduce CO2-emissions, limit the impact of global warming, makes us free from the geopolitical implications associated with fossil fuels and creates a healthier local climate. However, they are also confronted by local communities who are not too keen on them setting up shop in their neighbourhood. These companies are making the very same mistakes that mining companies did that historically have resulted in closed down projects. For windmills and other great alternative energy infrastructure projects the story is repeating itself as we place windmills in areas where people complain about noise or that protected forests are destroyed in order to make room for some of the extremely huge mills that we are now able to produce. While we continue to argue about the pros and cons of alternative energy the fact remains that we do not want these structures where we live and we can muster significant resistance against projects which are perceived to be destroying local communities. The result has been that all major windmill projects in Denmark are now being moved to the sea despite the fact that this will drive maintenance costs up and make green energy more expensive. This development could ultimately mean that green energy will not be competitive with fossil fuel and in the end destroy the sector, as a real energy alternative.

Companies faced with social risks have tried in different ways to mitigate issues with local communities. The most common approach that companies have taken when confronted with these types of risks is to implement a Corporate Social Responsibility (CSR) system that is designed to address stakeholder grievances in the local communities. These systems can take many and have different implications for the company that uses them. Evidence of this trend is clear if one takes a quick look at multinational companies and their websites where they routinely communicate they aren’t just in business to make a profit. A lot of companies actually goes as far as to communicate that their goals are equally focused on servicing the communities for a broader and bigger social purpose. It has been shown that CSR has been an effective way for companies to show that they are good corporate citizen with a conscience. And has been a way for them to communicate and convince local communities, nongovernmental and governmental organisations that they are working for a common good that will serve social, environmental and economic aims.

However, fieldwork shows that local communities might not be too keen on the sometime very fluffy speeches given by corporate executives. These communities do not only get their information from the company when trying to make sense of a proposed project but get insights from a wide variety of sources ranging from other community members to NGOs and government officials. This means that while the CSR systems might look good on paper they often miss the point that they are not the only way that communities get information and create an opinion about a given project. And by interviewing community members it actually shows that CSR systems are giving rise to even more risk as they provide ammunition in instances where companies say one thing but do another. Like for example when companies communicate a zero environmental impact on water sources but communities experience mud in their drinking water. Or when companies document that their windmills make no noise but people living close by creates headlines when telling the press about their sickness history.

Teghut tail 3

While research into social risk is still in an early stage it shows that companies have little control over how stakeholders sense making processes surrounding the projects that they propose. It also shows that CSR might not be the “miracle cure” that most of us would like it to be and could actually be counterproductive to the aims of the company and society at large. So called normal people will continue to make their own mind up around the world that they are part of and they will continue to change their mind when and if they get smarter. Even though companies would like to think that they can influence their surroundings by claiming that certain things are true such as green energy and windmill projects are for the good of everyone, it does not make the individuals affected by such project think that this is necessary true in their local community.

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Looking at the people side of risk

I was reading the McKinsey article by Alexis Krivkovich and Cindy Levy called ”managing the people side of Risk” which promote the argument that a strong risk culture can mitigate risk and maximize opportunities for business development. The idea seems appealing, that with the right leadership it is possible to implement the right type of risk culture and thereby enabling companies to “[acquire] new businesses, entering new markets, and investing in organic growth”.  However, this functionalist, positivistic idea of culture and risk does leave a lot of questions unanswered and possible constitute a risk in itself. Their main arguments can be split into three headlines.

Culture as a static entity

Is a risk culture something you can implement? Well, I will let it be up to you but from my almost 20 years in private an public organisations I can’t come up with just one example where a risk culture or any other culture have been implemented by management. I have seen many attempts, but never a successful one. The reason is that a risk culture can only be identified retrospectively. You only know that you have a successful risk culture if risk does not materialize into issues and tangible threats, on the other hand it could be that no issues arise because that issues and threats are simply not there. So the question is then, who can identify the culture if you have a strong risk culture if it is impossible to measure? Maybe it takes a McKinsey consultant…

People is the problem not the solution

Management rule their organisations like kings who can choose how individuals think and act in the world around them, or at least this is the claim of McKinsey. In their paper it is the idea that management have in-depth insight and knowledge about all the actions of their employees and that successful companies are the ones that have as much (mind)-control over their employees as possible. However, while we might strive for improved control and efficiency of organisational processes it’s only a few (feebleminded) who will claim that they have total control of employee’s actions. I think that we should count ourselves lucky that we do not have this type of control as adversity fuels organisations ability to innovate and develop and that striving for increased control on the magnitude indicated by the authors will only lead to organisational demise. So instead of perceiving people as the problem organisations should look upon people as the solution to mitigation of risk, not the cause.

Risk is universal

The claim is that successful organisations are the ones that hold people accountable for mistakes made – “To make aspirations for the culture operational, managers must translate them into as many as 20 specific process changes around the organisation, deliberately intervening where it will make a difference in order to signal the right behaviour.” It is not my claim that individuals should not be held accountable for their actions, but it should only be the extent that they actually have control. As risk is universal (fuelled by human actions and decisions) it cannot be one role or person sole responsibility to identify and mitigate risk. It would be impossible for one person to process just a fraction of the information on possible outcomes that organisations produce every day. Rather organisations should empower and disperse decision making to all individuals and groups in the organisation and hold them accountable for their own decisions and its consequences. The role of management becomes one of encouragement and support rather than control and punishment. They are there to ensure that people with right type of training and personal competencies are invited to participate in the continued development of the organisation so that they are equipped to handle mitigate or take advantage of the operational risks that they are facade with.

Mckinsey_MoF46_Managing people risk_

CSR is about focusing on the little things

It seems odd that when corporations show their commitment to society through CSR they get the most out of doing something about the little things. Companies that are successful looks at what they do well and tries to figures out how this impact communities that they are active in, in ways they could not imagine if they did not have the tools provided though CSR.

When reviewing the many definitions of CSR that is out there it gives little or no clue how actually to conduct social responsibility. It would seem that if one just followed conventional wisdom it would be hard if not impossible to satisfy even the simplest requirements given by all these different classifications.

“The Social Responsibility refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.” Bowen, 1953 in Social Responsibilities of the Businessman, which commonly regarded as the first milestone in modern CSR research and practice.

Another more modern definition have been issued by the International Standards Organisation (ISO) through their guidance on social responsibility “Responsibility of an organization for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour that contributes to sustainable development, including health and the welfare of society; takes into account the expectations of stakeholders; is in compliance with applicable law and consistent with international norms of behaviour; and is integrated throughout the organization and practiced in its relationships.”

Both of these very fine definitions give little or no clue to what companies should actually do to both successful in terms of profit, development and continued competitive advantage, and at the same time being in tune with societies moral compass.

But some companies have actually done quite well trying to combine their CSR with their core business. Just to give a few examples.

Danish Novo Nordisk has committed themselves to the task of “Changing diabetes” and have successfully introduced new products like Victoza inline with their core mission statement

The Swedish fashion company, H&M have under the statement “Conscious” has with worked to create sustainable fashion through a comprehensive CSR system that reduce risks in their supply chain.

Vivendi, the French telecom company, have initiated a program that promotes the safe use of the Internet to youth.

All of these initiatives are small when it comes to the efforts that the company needs to put into them because it is embedded in the “what we do” part of their business, but even so that have a huge impact on their outreach to the communities they are active in.

So even though it would seem that these successful companies are focusing on the “little things” they do represent a significant societal impact exactly for that reason.

Women on boards study from Cranfield School of Management

It is always a pleasure to post good news especially when it is on an area that I think is important. Women in top management and on boards have a significant positive impact on corporate governance, financial performance and stakeholder engagement.

I would like to see a gendered approach to HRM and recruitment policies being implemented as part of a strategic effort to strengthen the corporate backbone. Some of the research I have done in the area on how this can be done could actually be made to work if companies believed that corporate executives have to grown using the corporate pipeline.

Enjoy

Women on Boards six month review

Democratic deficit and the uneaven playing field

This is the next chapter in my series on Social Risk, enjoy.

What do “doing business” and the degree of democracy have to do with each other?

Well for one there is no doubt that companies that operate in environments where there is none or very few institutions in place to ensure a stable business environment often find themselves in situations where ethic and morality is strained. Just take a look at Shell in Nigeria (Oil drilling), H&M in Bangladesh (Clothing factory) or Maersk in China (Container factory) and one will know what it means to operate in such an environment.

To some degree the democratic deficit is self-imposed or reproduced through the understanding that we are “all on the same boat together”. Businesses blame the business environment, Governments blame international society, NGOs blame international business and the population blame politicians. So what we need is stable democracies that are characterized by good governance e.g. institutional structures in which the individual´s rights and freedoms are respected are a prerequisite for sustainable development. This means improvements in two areas:

  • That Rule of Law is upheld, ensuring a level playing field.
  • Democratic structures in place that ensures that can ensure that power is distributed and not centralized to a few individuals.
  • Cooperation should be undertaken with NGOs and civil society forces that work to achieve openings for democracy. In other cases, such as where civil society is small or non-existing, the focus should be on communicating an awareness of democracy, human rights, gender equality and market economy

In Sub-Saharan Africa, a region where economics determines politics of the day and where a culture of democracy has been absent and if present is under the will of a few elites. Even the smallest democratic opportunities are economically conditioned especially during elections because of poverty, corruption, illiteracy, unemployment and not least a playing field which has been all but level.

As we have celebrated the Arab spring there is no evidence that these old structures are so easily dismantled. We hoped for free-elections and a greater degree of transparency would be present, but it has done little in terms of growing a culture of democratic thinking in the region. For example, the political move by Mohammed Morsi to centralize power around the president in Egypt or the lack of security and move towards radical Islamism in Tunisia. The lesson is that democracy is fragile and needs to be supported by strong institutions that can balance the pursuit for power by individuals with the principles of democracy.  

The Social Democratic concept of democracy views political institutions as a means to offset the natural power of concentrated wealth that accrues in capitalist economies. However, during the economic crisis it has become apparent that individual states can’t handle the burden that they have been put under alone and have to seek assistance from others. In Africa for example there is no strong institution that can rescue countries in need so there are basically left to their own devisees, while we in the western world can draw on intergovernmental institutions like the EBC or others. In essence this means that the developing world is left with institutions like the IMF, EU, EBRD and the World Bank that impose strict guidelines for economic behavior and limits the ability for democratic processes. This again leads to a greater gap between the ones that have and the ones that don’t both on a region by region level but also between individual states creating tensions and eventually conflict.

For companies a democratic deficit means an uncertain future business environment. It means increased risk of catastrophic collapse and it means that what you might think is yours today might not be so tomorrow because there is no state to guarantee tour basic rights.

Links

http://www.economist.com/node/21555927

http://www.africanexecutive.com/modules/magazine/articles.php?article=5441

http://www.princeton.edu/~amoravcs/library/framework.pdf

Corruption – The disease that kills new business

No Corruption

No Corruption (Photo credit: Ann Douglas)

What is Corruption?

Corruption can defined as “the misuse of entrusted power for personal benefit”. It can also be described as letting personal or family relationships influence economic decision making, be it by private economic agents or by government officials. Corruption is always kept more or less secret and therefore is the individual behavior of corrupt agents almost impossible to observe systematically in real life. You know it when you are subjected to it.

The objectives of government are vital to the understanding of the diverse negative effects of corruption on the public service. Corruption renders governments unable or unwilling to maximize the welfare of the public for personal or the gains of a small group of people.

A corrupt principal creates allocation inefficiencies and cripples its credible commitment to effective policies, and opens the door to opportunism. Because corruption must be hidden from the public and is not enforced by courts it entails transaction costs, which are larger than those from legal exchange. This suggests that corrupt contracts are primarily relational contracts where legal exchange serves as a basis for sealing and enforcing corrupt agreements. Legal exchange not only provides for corrupt opportunities, but for the necessary enforcement mechanisms. Examples of such legal exchange are long-term business exchange, belonging to the same firm or political party or being embedded in social relationships. The latter may even comprise the engagement in charitable institutions. Reform should not only focus on limiting opportunities for corrupt behaviour but also on impeding the enforcement of corrupt agreements.

Two types of Corruption

According to transparenecy International there are two types of corruption that one can encounter “According to the rule”- and “Against the rule”-Corruption.

“According to the rule” constitutes a situation where an individual receives an illegal payment for something he/she is required to do by law – for example when a state official solicit bribes from a company for expediting a routine public service. “Against the rule” refers to a situation where a bribe is paid to obtain a service that the receiver is not authorised to provide but gains access to through a bribe. For example skipping the queue to gain access to a prestigious school or gaining a permit for which would normally would not be granted. Both of which are deemed as counterproductive to positive social and economic development.

There is no way to know how widespread corruption really is and the level of impact on financial and social development. As a Social Risk corruption is properly one of the first things that organisations investigate when investigating possible investments in a region or country primarily because there is a direct link between the perceived level of corrupt behaviour and general social issues like crime, rule of law, healthcare, etc.

When evaluating social risk in a region Transparency International, EBRD, OECD, IMF and the UN good sources for your assessment pared with local sources such as trade groups, the embassy in the region, government business development initiatives, etc.

Links on more information on Corruption and its impact:

http://www.ebrd.com/pages/about/integrity/reports.shtml

http://gateway.transparency.org

http://www.unodc.org/unodc/en/corruption/index.html

http://www.oecd.org/corruption/

http://www.whistleblowers.org

http://www.dfid.gov.uk/R4D/PDF/Outputs/SystematicReviews/Corruption_growth_SR_Report_Final_Revised-v2_SO.pdf

www.u4.no

Articles:

Bishop, T.J. and Hydoski, F.E. (2009), Corporate Resiliency: Man- aging the Growing Risk of Fraud and Corruption. Hoboken, NJ: John Wiley & Sons, 51–208.

Uslaner, E.M. (2008), Corruption, Inequality, and the Rule of Law: The Bulging Pocket Makes the Easy Life. New York: Cambridge University Press, 30–249.

Svensson, J. (2005), “Eight Questions about Corruption,” Journal of Economic Perspectives 19(3): 19–42.

Weitzel, U. and Berns, S. (2006), “Cross-border Takeovers, Corrup- tion, and Related Aspects of Governance,” Journal of International Business Studies 37: 786–806.

Luo, Y. (2006), “Political Behavior, Social Responsibility, and Perceived Corruption: A Structuration Perspective,” Journal of International Business Studies 37, 747–766.

Cuervo-Cazurra, A. (2006), “Who Cares about Corruption?” Journal of International Business Studies 37: 807–822.

Jensen, N. et al. (2010), “Understanding Corruption and Firm Responses in Cross-national Firm-level Surveys,” Journal of International Business Studies 41: 1481–1504.

Mapping the components of Social Risk

There is no doubt that companies are faced a level of scrutiny that the world have never seen before. Almost on a daily basis are companies being exposed as fraudsters, environmental culprits, tax evaders or child labour abusers. No company can know what or who will be next to be exposed in the media as the biggest unethical corporate abuser of the worlds resources.

One side effect of this trend have been the numerous standards and quality management systems that focuses on different approaches to reducing the risk of poor decision making and unethical corporate behaviour. There is no doubt that companies need a systematic approach in order to keep their managers and decision makers on a leach. However, there are limits to how comprehensive a given system can be and still be relative effective. Just think of the Sarbanes-Oxley or BASEL 2 frameworks, which did little to prevent the biggest financial downturn with an epicentre in the very industry that they were put in place to regulate.

As I see it is traditional risk management programs such as the above mentioned narrowly focused on operational and compliance risks and consist of short-term point solutions. Which are narrowed down to mitigation actions specific to particular sources or impacts of risk. But what happens when risks are rising from multiple sources and places within all the corporate entities? Point solutions can work well for pinpointed risk areas, where the main objective of the risk management effort is to avoid or prepare for a particular event and in so doing reduce the associated cost. However, focusing on one point or case cannot work for strategic risks, where complex origins demand an integrated management approach across entities, borders and levels of authority.

One dimension of social risk’s complexity is that it is often a function of strategic or operational decisions companies have made that affect issues that stakeholders care about. So instead of being a “one system fits all”-approach it encompass a wide range of areas which overlap and are integrated into each others systems in order to create a fine masked network which enables organisations to catch issues as they arise and before they become a crisis.

In the coming weeks and months I will try to explore the different parts of the Social Risk wheel that I have developed in order to better understand the organisational impact these individual elements might have on the positive developments of corporations in a global context.