A Critique of Pure Reason – Business forgot how to listen

Immanuel Kant Deutsch: Immanuel Kant

Immanuel Kant Deutsch: Immanuel Kant (Photo credit: Wikipedia)

Kant said; “Enlightenment is man’s leaving his self-caused immaturity. Immaturity is the incapacity to use one’s intelligence without the guidance of another. Such immaturity is self-caused if it is not caused by lack of intelligence, but by lack of determination and courage to use one’s intelligence without being guided by another. Sapere Aude! Have the courage to use your own intelligence! is therefore the motto of the enlightenment…” (Critique of Pure Reason)

But it would seem that Business did not learn that listening meant one had to listen to somebody else than the ones that represent the status quo.

What happened when it became common sense and a taken for granted thinking, that any business venture claiming to be socially responsible had to have a direct link to the bottom-line? As a keen follower of CSR and developments within business ethics it seems that the discourse of Corporate Social Responsibility have steered of course and to some extend have fall down a cliff.

CSR was about (I thought) making a difference to society not because it made good business sense, but because it was the right thing to do. Now it seems to be the other way around. Even though I to a large extend blame Porter and Kramer for their so-called “shared value” they only tap into a discourse, which already existed in the mainstream business culture. That “there is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud “(Thanks, Friedman for making it clear). That in order to be a legitimate in business one had first of all to think of the bottom-line, that even though business might disclaim Freidman’s claim they continue to follow his credo. CSR have become a business opportunity rather than change in they way that business relate to the society and communities that they are a integrated part of.

It seems to me that companies that pursue profit in the name of CSR are trying to stand on both sides of the river. Claiming that they have not left their liberal roots, while at the same time trying desperately to convince their more critical stakeholders that they are continuing down the path of rightness.

However, at the core of CSR is the ability to see beyond narrow self-interest looking beyond profit seeking and towards doing the right thing rather than doing things right. I do not claim that any business will be any more successful, or that they will even have a better brand or see an increase in dedicated employees. What my argument is that in order to really and I do mean really, know ones business environment one have to be open, open in a way that puts aside narrow interests of division leaders and executive managers and beyond one owns business raison d’etre. Individual business leaders have to realise that their actions cannot only be guided by the search of “the business case” they will have to use their intelligence to incorporate the guidance of the people who is affected by their decisions.

Stakeholder Theory explained

Here is a video by Edward (Ed) Freeman on stakeholder theory and what he means by organizations need to engage with the community, customers, business partners and other interested parties. I think the stakeholder theory is central to the concept of CSR and if one wants to understand business ethics, corporate governance, triple-bottom line, and other concepts within the CSR discourse one also need to understand how stakeholders and stakeholder theory plays a central part. Enjoy.

Back to the Why of CSR – Its the story that matters

From time to time it can be difficult to establish what it is all good for why is it that we are so focused on the business case, brand value, if we are listed on the FTSE4Good or not etc. We tend to be preoccupied with the technicalities or the How of CSR and not as much on the Why. The Why tend to be taken for granted because there is so much pressure on showing that we can be transparent, accountable or that we have a effective plan for our work. But when we are forced to think about and explain why corporations are engaging actively in CSR and goes beyond the mere management of stakeholders we come back to the basics of telling the story of doing good.

I have never met manager or business leaders who have not taken a stand on their business impact on the society they are part of. Some would claim that paying tax would be sufficient others have a broader perspective on the thinking, but common for them all is that they have taken a stand and that they have a personal story to tell that explain that standpoint. They like all of us have focused on the Why while we might disagree or agree on the standpoint they do have a personal story to tell that have shaped their opinion and convinced them why their standpoint is the best solution to business role in society.

Now I could leap into a greater discussion on the different discourses of CSR explaining the pros and cons of Friedman or Porter and Kramers standpoints or maybe explain why Ruggie is such a proponent of political CR. But I will refrain from this discussion and just conclude that we have different perspective on the role of business and even though one manager might be reluctant and sceptical towards CSR in general, most large business are in some way engaged in the subject anyway. So even though management might be pretending not to be religious about CSR when they fold their hands they are still praying.

So back to the first question and the Why of CSR. In my opinion it is all about the story about the journey the corporation describes and the willingness to share this with the rest of the world. Basically explaining to the world about your individual Why. At the Global Compact website there are hundreds of stories about the Why of CSR some from companies that have integrated CSR in all parts and corners of their business others have only focused on a very narrow part of the CSR spectrum.

One of the places were one can find stories about the corporate CSR journey is in the Global Compact (GC) case story archive. The story being told are of cause about the ten focus areas of the GC and how different organisations work with each of these elements individually. The idea is that best practice can be shared among the participants and beyond. But the story behind the story is about how some stories are told better or have a greater appeal than others. For example have most of the storytellers a real and definite focus on environmental issues and especially their carbon footprint, but almost no one have a story to tell about their anti-corruption work. This differences in corporate attention gives a real picture of the Why organisation engage in CSR activities.

The same picture is evident when one examines the Communication on Progress, which is a precondition for continued membership of the GC. Corporation just seems to focus more on the areas were their most salient stakeholders have their main attention. In research done by Ralf Barkemeyer on CSR in the context of international development he found that the main focus was on environmental issues followed Human rights and Labour rights and last to come was anti-corruption. Another interesting thing that came out of the survey was that a very large proportion of the issues addressed by EU companies were directed at the home country and not as one might think at the countries were the corporation was most active.

This tells us that the Why of CSR should be found not in the effort top do well by doing good but rather as a way for companies to confront some of the issues that their most salient stakeholders have with the company. These can be customers who demand specific actions, but more likely it is home country media who highlight specific issues, which have the possibility of threatening to companies’ ability to operate efficiently. In resent years the majority of this pressure have been channelled through institutional investors who have a increased stake in ethical investments. While individual shareholders might not be influenced by corporate decisions the case is not the same for larger investors such as pension funds or large unions.  The reason why we make this distinction is based on some of the characteristics of these two investor groups.

Individual investors tend not to know their investments portfolio ethical performance. While they might know a great deal about the economic performance they have little or no knowledge or for that matter interest in the CSR work that the company is involved in. The reason is that most investors (excluding shareholder activists) have a very limited view on corporate performance stretching for a short period of time where they expect their stock to perform. This strategy encourages companies to focus on indicators, which they can influence with relative ease compared with larger problems one can find with the area of ethics and culture.

Institutional investors have a clear interest in long-term engagement meaning more than five years. First of all because institutional investors are normally able to invest relative large sums of money in a company and by that have a opportunity to influence its strategic development. Second, as a institutional investor you are under constant scrutiny by the press and other media on how you put together your investment portfolio. There have been several instances were investors have been forced first by the press and later one by their own stakeholders to change their investment strategy. Just take the Norwegian oil-fund, which I have blogged about some months ago and their engagement in Burma.

The lesson is that the Why of CSR is about the tory one tells or let other tell about the organisation. That organisations ethical performance is much more normative that we would like to think and that if we like stories about Ecology or Human rights there will also build a pressure for corporation to act within these areas. And that if we are enough that think the same way about a issue we will change corporate behaviour even though it is against the monetary logic of the moment.

Integrated Market Communication as a CSR communication strategy

In the introduction of the CSR training that I’m involved in with the CSR gender group I start out with asking the participants which definition of CSR they subscribe to. The answers normally vary a great deal depending on the audience but for the majority people would like to be told what and how CSR is to be formulated. These are the four definitions we present:

 “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.”

“The Social Responsibility of business is to tame the dragon, that is, to turn a social problem into economic, opportunities and economic benefit, into productive capacity, into human competence, into well-paid jobs, and into wealth.”

Corporate Social Responsibility is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.”

“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.”

However, I believe that is a misunderstanding to tell people what definition they should subscribe to. Rather it should be negotiated between the organisation and its key stakeholders on a continues basis. CSR is not a management system and will never become such a system simply because it is based on the principle that “Any group or individual who can affect or is affected by the achievement of the organization’s purpose and objectives”(Freeman, 1984) have a stake in how the organization develop.

What organizations can do is to become effective in their efforts to identify, categories and negotiate with the stakeholder on what activities that it should engage in. Such a framework can be found using a integrated marketing (IMC) approach enabling organizations to communicate effectively with multiple stakeholders and at the same time indentifying less salient groups which might have a interest or is affected by the organizations activities.

IMC can be described as a process which involves the management and organization of all stakeholders in the analysis, planning, implementation and control of all marketing communication contacts, media, messages and promotional tools focused at selected target audiences in such a way as to derive the greatest enhancement and coherence of marketing communication effort in achieving predetermined product and marketing communication objectives.

An IMC approach will in my mind be the most effective framework a given organization can adopt if it wants to be regarded as social responsible player and keep some influence in relation to its identity, culture and image.

Who is best in class

The Down Jones sustainability index have just issued a press release were they state that the DJSI is now including 20% of all the companies in Down Jones (out of 2500).  In the release DJ states that it will use 513 components in their screening process and in addition they will use 459 components that exclude companies involved in tobacco, alcohol, gambling, armament and firearms, and adult entertainment.

One of the reasons for the change and expansion of the index is that institutional investors have been asking for a more diverse “investment universe”. As Rodrigo Amandi CEO from SAM Indexes (the screening company) states “SAM Indexes has repeatedly received inquiries for a more extensive investment universe from institutional investors managing sustainability portfolios. It is inspiring to see the increasing importance investors attribute to sustainability criteria and we are looking forward to providing this benchmarking tool, while continually expanding our unique Sustainability Investing platform.”  

This made me wonder on what ground the index was expanded. One of the major issues in SRI is the exposure to risk. Because your choice of portfolio is relative small compared to traditional investors there you have fewer options to diversify your investments. If however the index from where you can choose companies from suddenly expands your risk will subsequently fall as you have more options to pick from. The DJSI is one of the criteria’s that many investors use to legitimize their choice of portfolios and companies use the DJSI logo on their homepage when they get included. So there are a lot at stake when the index is included both for all parties involved.

I think this show some of the complexity of SRI and how to handle the fundamental issue of “being good while doing well”. A social conscious and responsible investor wants to invest in companies that make the world better off in the long-term. This would naturally mean that a lot of companies would have to be excluded. In the DJSI we find companies like Chevron (Oil) and until recently was also BP included. Both companies would not be associated with long-term sustainability. Also companies like Vodafone and General Electric are part of the top holders of the index both associated with conflict minerals which are used in mobile phones.

I will not argue for or against specific companies being part of the DJSI or another index for that matter but I think it highlights some of the central issues that we as investors face. To what extend does a given index support our own view of what a sustainable company constitutes? Why exclude Alcohol and include Oil? I would not be able to tell you which one make out the biggest danger to our common health. Why exclude firearms and include mining companies and electronic manufacturers that rely on the cheap raw materials which the arms are helping produce.

Of cause one has to draw a line somewhere and it might as well be where the DJSI puts it as anywhere else but It makes one wonder what a true sustainable business really is.

Portfolio management

SRI strategies entails that you create a portfolio made up of assets which in some way have been screened for the ethical behavior. I have been researching different alternatives in order to “spice” up my own ideas for screening and this is the list I came up with.

  1. Ethical Negative Screening: Avoiding Companies based on ethics, moral or religious grounds
  2. Environmental/social negative screening: Avoiding companies based on their damage to the environment or due to social issues. 
  3. Positive Screening: The active inclusion of companies based on their environmental or social benefit.
  4. Community and social investing: Allocation to capital to companies whos mission is to produce social returns.
  5. Best in class: Invest in companies that show bet is class capabilities in their industry in relation to environmental and social issues.
  6. Financial weighted best in class: Actively inclusion of companies who outperform their peers on financially material environmental and social criteria.
  7. Sustainability themes: Investing in companies who have a “green” product.
  8. Constructive engagement: Invest and encurage dialouge with companies to include more ESG issues.
  9. Shareholder activism: Use shareholder rights to pressure companies to change environmental, social and governance issues.
  10. Intergrated analysis: Actively include ESG criteria within conventional fund management.
  11. Norms-based Screening: Avidong companies who do not subscribe to international standards and norms such as Global compact and OECD guidelines for governance etc.