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.

 

What is Money? – And the consequences of inflation

It would seem that the whole world evolves around the subject of money for as long as anybody care to remember the world have focused on getting money or capital. Even in the Soviet Union there was a relentless pursues for getting capital, by boosting their own money (the Ruble) they tried to get their hands on as much foreign capital as possible. In the end they, as we all know, failed to get their hand on enough of the stuff to keep their communist paradise working but that just support the fact that the world is just hungry for the stuff.

There is of cause an alternative to money. If you chose to live and work in a isolated place were all exchange is made based on a economy based on the things you produce you really do not need to invent money. However, we have chosen to invent money because it is the easiest way to exchange wares and information. It also makes things less complicated, while we think that the globalised world of economics is a complicated system think of it if we had to exchange everything with a proportionate amount of things. How much coffee in Africa would you be able to buy for a Danish cow and how much of the cow would be given to the transporter? If you made paperclips how many would you have to pay the people who made them at your factory and what would they be able to buy for those clips in their local bakery? One could only imagine how cumbersome bartering as it is called would be if we implemented it on a large scale.

So money makes things easy. They are tokens of what we as people appreciate as value. This does not mean that we from time to time will accept other forms of currency. Like the exchanges seen on black markets around the world were exchanges are made in natural resources. An example can be the cigarette economy we see in prisons or in the post World War 2 or the exchange we make with the neighbour when we exchange a favour.

So the main characteristics of money are:

  1. It is generally accepted as payment for other things.
  2. It is a way of measuring the price of other things
  3. It can be saved, so you can keep the value it represents until later
  4. It is relatively easy to transport
  5. The unites of money are, or should be, standard and easy to recognise
  6. The supply of money must be controlled

It is the last of these very true statements about money, which I think is the most important because it controls all the others either directly or indirectly.

At the time when money was born we used Silver and Gold as the medium of exchange. The king or government who controlled the flow of money could make coins that could be used for exchange but which also carried a real value in themselves, namely the value of the gold or silver that made up the coin in the first place. However, what happened was that in time of trouble kings and governments tried to forge the coins by using less of the valuable metals. This practice worked well as the king could mint more coins this way and by that ‘inflating’ the value of his fortune. This lasted until somebody found out that this practice was undertaken and people adjusted the price according to what the king had done. But as it was difficult to say exactly what the amount of gold or silver that was exchanged in the coins it was more like a qualified guess of what the inflation was. So even f the king started to print money with the right value it would continued to be undervalued for a period of time until the price could be adjusted and the market had confidence in what the king was doing. We actually used gold as the standard to determine the value for money all the way until after the Second World War, which can serve as a witness as to the confidence that people and governments had in the standard.

What happens when you have more money than needed in the system? Well basically it becomes worth less. Like in our barter economy if you have too many paperclips in circulation the price will start to drop. This is exactly what the central banks of Europe and the US is doing when they keep the interest rates down. As money is flowing out of the system because of the crisis they are pumping money in by printing more money than is flowing out. So what will this mean to you and me.

Well if you won a house you will properly be paying less money for it on a monthly basis. By having cheap interest rates you will be able to borrow more money at a cheaper price and thereby you will be able to buy a bigger place to live in. Also other types of loans will be cheaper so you can buy the new Apple IPhone or a new car by going to the bank and getting cheap cash. Some stores even let you lend money at a zero interest if you buy one of their products. But cheap money also leads to higher inflation because just like the kings of the Middle Ages people cant be certain what the real value of the money that they have in hand is really worth.

The consequences of inflation are that the things you need to buy for cash becomes more expensive. So when you go to the supermarket the price for food will be higher, when you want to get something for the wife or you husband it will cost you more. While some of this increase in price can be contributed to the dynamics of the market and society in general one will not be able to explain the whole increase. The testimony that support this claim can be found in the fact that the price for food all around the world is on the increase and have been for some time.

Another consequence of inflation is on everybody that has savings in the bank. If you have money saved you might get every were from 0.2 % to 1 % interest but if the inflation is 4% you will loose money. So what people do if they have enough and can look at substantial loos is to invest their savings either though a pension fund, through investment companies, or make the investments them selves. This works well as log as the market is expanding and everybody is making a profit but in times like these investors can look at substantial looses and even more than they would have if they had kept the money in the bank on a regular account. This can lead to even more speculation and risk taking leading to even greater instability on the market, which again leads to even more money disappearing from the system.

Some would claim that monetary inflation is actually a tax by which government or kings for that matter transfers wealth from its people to itself. Inflation is perhaps the most destructive tax that can be imposed on people but it is unfortunately also the easiest one for a government to impose – it just needs to print more money than needed. It results in the transfer of enormous amounts of wealth from the hands of people to the hands of those speculators shrewd enough to take advantage of the price volatility inflation causes in the markets.

Inflation is a strike against the welfare state. In most western countries a large majority of employees work for the government either directly or indirectly. All the funding for the states activities comes from the taxes it is able to impose on its citizens so there is a clear interest for the state to decrease the wage demand from the public servants and the money they spend on behalf of taxpayers. However, when the wages in the private sector increase as we could see post 2007 then there becomes a demand from the public servants to get paid more. The money to fund this increase can either be found in continuing to have a significant wage gap between the public and private sector, by increasing taxes or by decreasing government spending. But many governments have opted to do neither because it was politically unsound so what they have done if they could was to increase inflation either though printing or though borrowing. This is what we have seen in Greece, Italy and the US who have resorted to systems were they are spending significantly more than they GDP would normally allow for.

So what can governments do? And this is where it becomes tricky and more a thing belonging to ideology or theology. One ideology would prescribe to cut government spending at all costs and decrease the budget to what is actually is coming in in the form of tax revenue. Another group would go the other way and use money to boost the market and crate jobs feed by government activity like infrastructure or better education etc. The thing is that we do not really know the dynamics of a globalised economy at the scale we see today. There is no theory that will prescribe what to do if we want to keep our welfare state in some form of working order and keeping an society which can provide the benefits which we have fought hard to get over one hundred years.

It is now that CSR have to prove its value

Cover of "Too Big to Fail: The Inside Sto...

Cover via Amazon

Europe and the US is standing on the brink of bankruptcy. Countries like Greece, Spain and Ireland have already over exceeded the boundaries for what can be accepted as good governance by any standard and the US is struggling with internal political issues that have the potential of destabilising the whole world. Unemployment is staggering high with Spain leading at over 21% unemployment and with a situation among younger people, which is even worse at over 40% having problems finding work. Together with the Greek currency bond being rated as junk by some of the big international rating companies the basic outlook bleak if not hopeless.

If the problems were only confined to a few countries it would not have matter that much but in a globalised world we are all interconnected and if these states fall into national bankruptcy we will all suffer. First of all will countries like Italy and Ireland be some of the first to go under a and these will be closely followed by others in the European region. And with 11 of the Euro 27 countries having unemployment rates in excess of 10 % (4 over 15%) there is little or nothing to buffer any kind of downturn.

There are of cause some economies that are doing better than others but in general economies are strained and there have been little in terms of economic recovery since the crisis in 2008. Basically the states have used up all or close to all their resources in order to cope with the last crisis and they will have close to zero chance of making it through another.

So why should companies care? Their obligations are not to the state or the currently sitting Government so why should they bail out the results of irresponsible economic practices.

Well first of all there will be a direct impact on business if they do nothing. A state in bankruptcy will not be ale to uphold its trade agreement with companies meaning potential huge losses. They will try to find similar products at a cheaper rate such as copy-medicine or they will stop treatment all together. There will be little or no investment in infrastructure in areas like energy, roads and water meaning that the ability to conduct an efficient business operation will be reduced.

On a longer term basis it will mean increased corruption and poor governance as countries will be unable to effective police its own laws. A bankrupt state will also men that the country will be less able to educate their own population which have a effect on business as they will be unable to recruit qualified people.

So what can business do? First of all they can start by paying tax in the countries were their operations and customers are. A significant number of companies in Europe and the US are not paying the tax that they should if companies like Google, IBM, Morgan Stanley, DHL and Apple. Companies that have gotten millions in government hand-outs or stimulus money as it’s called should start paying back and not continue to hide money away in tax havens. If they just paid the tax, as they should have done in the first place all our trouble would basically be over. Companies should not be overtaxed but they should at least pay the basic rate in the country that they are situated in. Transfer prising and other trick of the trade have to be governed in a way that will allow countries whom are providing the educated labour, markets, infrastructure and social systems benefits also gets the funds to maintain these systems. Tax systems have for too long been a competitive advantage and this issue have to be effectively resolved.

The biggest of the corporations need to live what it means to have economic power, which is bigger than most countries. Big multinational companies like Shell, Wal-Mart, Exxon Mobile, AXA, General Electric, IBM, Citigroup and Bank of America that are bigger economic entities than countries like New Zealand, Vietnam and Morocco have to live up to this responsibility. One cannot continue to act like a “normal” business when ones impact on demographics and society is so great. These entities are outside our democratic control and while I do not believe that they would willingly be engaged in wrongdoing I do believe that we need to increase transparency to the level that we have on governmental level in order for stakeholder to truly evaluate the performance of these companies. As Andrew Ross Sorkin so adequately put it these companies are simply “Too Big To fail” and in 2007-08 we saw what happens when they doo. Still today we have a hard time believing that companies like Enron and Lehmann Brothers do not exist.

Third corporations have to integrate their CSR. A quick look at CSR reporting will show that most corporation still view their impact and responsibility to society as part of their everyday thinking. When managers and executives take decisions in big transnational companies we have too often seen that they do not have the necessary understanding and comprehension of the effect that their actions will have on society. Time and time again we have witnessed how highly professional business leaders have created situations which they themselves could not comprehend or even fully understood that had significant implication for a much wider group of people than original anticipated. Therefor the “Responsibility of the Businessman” as Bowen describes it needs to be embedded in the very basics of business thinking and education. We cannot keep on having CSR as a add-on to other activities that corporations are engaged in it has to be like Visser so will put it embedded in the corporate DNA.

Some might claim that these proposals are more or less communism or at least socialism in disguise. But I think that the facts speak for themselves when I say that the current way we are handling capitalism is not working to our advantage. I do not speak against people making money of their hard efforts or that some people are just smarter and better at doing business than others and should be rewarded as such. What I’m working for is business done on the basis of having talent and knowledge, which is hard if not impossible for others to duplicate. Not as it seems to be the case today that who ever is the one with the lowest moral and willingness to exploit the ability to withhold information to others that come out on top.

The teeth of the dragon

What happens when the Chinese bids on large contracts outside Mainland China? If one is to take the lesson from what is happening in Africa and South East Asia it would seem that there is reason to be somewhat comprehensive.

Recently there have been moves by China to bid on European railroad contracts. This type of infrastructure work requires large amounts of labour in order to lay the many kilometres of track, which is required.

If one looks at the experiences that we have had with China in the developing world in tendering for major contracts they have often included the use of Chinese labour to execute projects. In some instances have entire shantytowns sprung up overnight, and thousands of Chinese labourers are shipped in order to make the often very tight budgets. According to Chris Devonshire-Ellis is the Principal of Dezan Shira & Associates “The exclusive or almost exclusive use of labour from mainland China almost always runs contrary to local laws and national regulations, work and safety permits, in addition to breaking the host nation’s individual income tax laws, but lax policing, state inefficiency, simple corruption or authoritarian states allow many to turn a blind eye.”

In some instances the use of cheap labour have produces some very bizarre situations were local governments have actively participated in the cover-up of breaches of both national law and the principles of fair trade across boarders. One example comes form Sourth East Asia:

“In order to keep the local population in the dark, many such projects, such as the building of a port on Sri Lanka’s east coast, involve the placing of high security road blocks to prevent access and even Chinese machine gun manned security guards to keep curious locals away. If no-one can see the project, no one can get politically upset about the lack of involvement of local labour, even if that labour is generally considered lazy and inadequate. It is, in many cases, a pragmatic, yet somewhat grey solution to getting much needed projects built. Never mind that it is usually illegal. Authoritarian governments can always find a way.”

In another instance from Africa Chinese management gunned down several works as they protested over working conditions at a mine. The incident as it was called occurred at the Collum Mine near the Zambian capital of Lusuaka. The mine is privately Chinese owned by a family with investment interests in coal mining originally in Jiangxi Province. The Collum Mine managers are all Chinese nationals with little or no understanding of either English or the local language, Tonga.

According to the South China Morning Post, African workers were agitated over labor conditions and were protesting outside the managerial office. The Chinese management apparently panicked and shot workers with several shotguns. No workers were killed, but several were seriously wounded.

Could one imagine something like these incidents in Poland or France? If we only pursue short-term profits and go for the lowest bids we could very well see situations like these emerge in mainland Europe.

Amazon maps the US green movement

Amazon have made a survey of purchases across the US and have found that some places are more environmental aware than others. Using its sales figures Amazon has found out which states are purchasing the most environmentally friendly products. The study showed that California, New Hampshire, and Vermont are the places that purchase the most sustainable products across all categories, compared to the national average.

The analysis also looked at Water conservation, Energy savings, Organic foods and Green Parenting. Based on purchases of environmental books, Vermont, Montana, and Washington, DC residents top our list of Most Well-Read Environmentalists. On a local level, Missoula, Montana residents just might be way more environmentally knowledgeable than the rest, with well over five times the national average of environmental book purchases.

Acording to Amazon they see the analysis as evidence that”The regionality of Amazon’s maps is evidence against the tendency to think of the Internet as an enabler of irresponsible, far-flung purchases. Yes, the Internet does make it possible for people to buy extravagant things from exotic places. But it also makes it easier for people to find things they need to live greener lives at home. And that’s what Amazon’s customers are doing, wherever their home happens to be.”

At least I found the evidence interesting even though that the internet has made the world more flat and that we have become victims of our own consumerism. You can judge for your self.

Get certified to ISO 26000 (part II)

As promised I went to the official opening of DS26000 a Danish interpretation of ISO26000 which you can be certified to. The DS stands for Danish Standard and the organisation have a license to certify ISO products in Denmark. The presentation was situated in the centre of beautiful Copenhagen at the 400 years old observatory. You might be able to remember I had my doubt about the new program and being at the presentation did nit make me less apprehensive.

  • The international ISO organisation does not support any type of certification actually they state very clearly that any claim that one is certified to the ISO26000 standard is contradictory to it wishes. As they state in there press release per 30 of November on their position as:

ISO 26000 has the purpose of globally enhancing social responsibility, sustainability and ethical behaviour in all kinds of organizations

There will be no accredited certification to ISO 26000 as this is contrary to the intent and spirit of the standard

Any claims of certification to ISO 26000 are misleading and are not a demonstration of conformity to ISO 26000

ISO members will report any organizations providing certification to ISO 26000 to the ISO Central Secretariat

ISO shall communicate this to its members who will be requested to communicate within their own countries to regulators, stakeholders and industry.”

I had the opportunity to ask the panel about what they thought of the position of ISO on making a certified standard and they claim that. 1) It is not contradictory to ISO26000. 2) That DS are front runners and others might see the benefit in the long term. 3) That the ISO process was in essence a compromise and that Danish organisations have more freedom to manoeuvre.

  • CSR is in essence a product of globalization. This means in practice that any CSR effort has to meet the needs of the globalised world e.g utilization across borders, regions, cultures, etc. One cannot go against the international norms and standards because the organisations rely on systems that can be used in more than just one reality. If a given system is going to be successful it basically needs to look beyond itself.

In the world of economics international systems have been in place for a long time and even though there are many flaws they do act as a platform for a common language.

  • ISO wants the standard to be in the front end of formulation what the discourse on CSR should look like. But already one month after the initial start-up we see that there are cracks in the interpretation and how the system should be implemented. With DS going their own way and with the emergence of new CR standards like BS8900, it is unlikely that it will have the rigidity needed to stand the test of time. Simply because there is no consistency or common understand of what the basics of the standard is about.

Conclusion:

I think it is a grave mistake to create a certified program and thereby showing how divided the organisations are on the issue of CSR (understood in the broadest possible terms). The ISO 26000 was one of the milestones that many organisations and professionals had been waiting for and the product in it self is not all bad. It is a compromise and there are flaws but it is to be expected and I’m sure that it can be worked out. However, if the debate is going to be about formalities and process like certification, lengths, definitions and claims of legitimacy then we are not doing the world a favour by introducing yet another definition of what good CSR work looks like.

I also wonder what the response is going to be from ISO, if any. If the organisation should live up to their words presented in the press release they would have to sanction DS in some way or another or at least make a public statement about if they support DS in their business venture. It is a clear conflict which needs to be resolved as quickly as possible not for the sake of the organisations but to insure the future success of the ISO26000.