Corporate Social Responsibility CSR 2.0

This is my comment submitted on the Article: CSR 2.0 Competitive Advantage for the Future, by Alberto Andreu Pinillos, Global Director of Reputation, CSR, Brand and Sustainability, Telefnica SA.,

Thanks to Alberto for having sent me his paper titled CSR 2.0 Competitive Advantage for the Future that was originally presented by him at for the annual Reputation institute seminar, 5 May 2010, Institute of Directors, London. He has raised important questions and offered solutions for a competitive advantage for the future with a proposal CSR 2.0.  I am pleased to comment on the same with the extract from his paper followed by my comments in blockquote following. This blog is in its entirety devoted to my theory of Inactivity Based Cost Management [IBCM] that I have authored with a sub-title Measurement of Intangible: Governance, Ethical & Fiscal Responsibility and Accountability, where every one of these terms including Intangible is defined and buttonholed. So my comments indicated as IBCM will have the perspective of Alberto’s paper analyzed.

Jayaraman Rajah Iyer

1. The new era of responsibility

AAP: It seems evident that those of us dedicated to this area have not established CSR on sufficiently solid foundations so as to turn it into something strategic, linked to the business. Or if we have done so, we haven’t been capable of communicating it to those interested. A situation of recession, when companies cut back on costs, personnel, etc., places CSR in a delicate position, especially when the actual crisis points to the lack of ethics and transparency.

..themes that in the last few years have made up the roadmap for CSR: civil rights, ethics, disabilities, poverty, climate change and energy efficiency, family, women’s role in society, education, the elderly, health, etc.

This ‘new era of responsibility’ has been summarised by Robert Zoellick (2009) into five main pillars: responsible globalization, where inclusion and sustainability prevail over the enrichment of a few; responsible management of the world’s environment; financial responsibility, both at a personal as well as an organizational level; the era of responsible multilateralism where countries and institutions look for practical solutions to interdependent problems, and lastly, the era of responsible actors, in which participation in the international economy leads to responsibilities as well as benefits.

…the establishment of an agreement at the European and global level on the model of economic and social growth based on matters such as the financial system, commerce, climate change and energy, employment and social cohesion, and lastly, the fight against poverty.

IBCM: Well articulated as to the connectivity between business profits or loss to the adherence of principles set by CSR. The issue areas are set by the roadmap that seems to be ever growing in the need to address the consequences of implementing or not implementing it with the relative impact on the financial system and commerce, with the ‘new era of responsibility’ where countries and institutions look for practical solutions to interdependent problems.

The point to note is ‘where countries and institutions look for practical solutions to interdependent problems’. The five main pillars of Robert Zoellick concludes with the emphasis of ‘responsible actors’. The CSR 2.0 does not bring out the responsibility of the governments and Corporate. The problems since they are interdependent, the solutions must be clearly demarcated between the two as to who is responsible for what.

IBCM splits responsibility into two categories: Ethical & Fiscal, and defines:

Ethical Responsibility – the state or position of being responsible for the resources entrusted to the people to run a government of the people, by the people and for the people, including the delegation of authority for the governance of the said resources to those who are entrusted with the usage.

Fiscal Responsibility – Individual entrusted to manage and administer the resources authorized by the Ethical Responsibility for the benefits of the people.

IBCM in allocating responsibility assigns Ethical Responsibility as the exclusive domain of the people whereas Corporate & Government including the 3 wings of it have only Fiscal Responsibility. The 3 wings of the government has no powers other than the delegation of powers by the people. So is the Corporate where the owners are the public. CSR 2.0 must recognize this aspect of responsibility, then Zoellick’s statement of interdependent problems can be clearly understood as well the irresponsible actors are immobilized, so as to attain ‘a new era of responsibility’.

Corporate submits a profit & loss account, whereas the government provides a statement of income & expenditure. The expectation of the owners are distinctly different without one overlapping the other. Public invests in Corporate to share profits, votes for a government to share benefits. Pubic wants from the Corporate adherence to 10 Principles of UNGC which is no different as cost than payment for salary or wages or materials or services. In the event of any further expenditure public would like to know the causality factors as AAP has rightly pinpointed: “Investment in social projects should be made in the same way as R&D is invested in; namely, new applications are researched in order to open new business niches which, in the medium term, should become the new drivers of growth for companies.”

President Obama also said during the inaugural session of the US Congress:” We have all seen how quickly good intentions can turn into broken promises and wasteful spending.” If CSR 2.0 has to become successful then UNGC must turn into a qualitative substance comprising statement of problems and the way to resolve without the dichotomy of Corporate and Government responsibilities. As it has been done in case of UNCAC, UNGC must be signed by all countries as a Treaty. As on today UNGC is a document of good intentions, whereas UNCAC is a document of substance with quality. But nothing stops UNGC to adopt UNCAC without wasting time that can be applied to bring CSR in line with Anti-corruption for implementation and Governance.

CSR 2.0 must extensively discuss the participation of Government in its endeavour to bring in a Humane Society. CSR 2.0 has included many in its objective to transform the society, including philanthropy and poverty alleviation. IBCM strongly believes it is not to be included under CSR 2.0 because, by including under CSR 2.0 the governments slacken in their duty. Their responsibility is quietly handed over to Corporate. Government is run in the most despicable manner world over with trillions of dollars kept in tax havens. Governments have not distinguished themselves in their controls. Interdependent problems must be weighed and allocated to individual Fiscal Responsibility areas, between Corporate and Government. Corporate has to get the clearance from their shareholders. The additional burden of CSR would bring down the Corporate who are making profits. Governments have any number of ways of taxing the Corporate and the public. For all these extra burden, Governments must find a way out. Freedom of enterprise with threshold values as stated by 10 Principles of UNGC alone can get the Corporate to help the society to alleviate from its problems of unemployment, poverty and economic chaos.

2. The challenges and opportunities of CSR

AAP: I believe that the time has come to change the discourse and to be able to establish the cause-and-effect relationship between CSR and the profit and loss statement. And this is the thesis: To what extent can CSR generate more profit? Can it reduce costs and minimize risks? Can it impact on margins and customer satisfaction? Can it improve the working environment? If we are able to establish the cause (CSR)-and-effect (more income, lower costs, greater customer satisfaction, better working environment) relationship, the debate on CSR will be won.

But this approach requires two basic premises.

Firstly, a change in the language used by CSR professionals is required. To start with, there is a need to start abandoning what some call “do-goodism” which is translated into the sentence “we have to give back to society”. This concept, based in particular on philanthropy, is hard to maintain in a period of crisis; and, even, if you’ll pardon me, it seems that the company has to justify itself for making money… does it really have to apologize for that?

Secondly, and beyond the concept itself, it is necessary to change CSR’s management framework. Investment in social projects should be made in the same way as R&D is invested in; namely, new applications are researched in order to open new business niches which, in the medium term, should become the new drivers of growth for companies.

IBCM: Causality clause mentioned is the most appropriate analysis that shall be attributed to the use of CSR. IBCM is the very essence of causality attributing the cause and effect of a matter as to how the creative and action process where quality is an integral part of the substance and the action that cannot be separated from it. It enables accomplishment of infinite succession of finite purposes by controlling each goal. Each substance has an identical creative process, sentient as well insentient, and has unique action process. When yoked with another substance each one of them retains its independence. The transformation process is identifiable that enables the cause and effect of one substance over the other. The effect of CSR i.e. 10 Principles of UNGC can be directly attributed to the profitability of the company.

IBCM agrees with AAP on the concept of do-goodism. However the very purpose of running a corporate is essentially to promote the 4 issue areas of UNGC which is a contribution to the society.

CSR as growth drivers for companies is the right concept. Indeed it takes away many of the risks from the market once the company has the certification of UNGC. CSR as Innovative R&D investment will pay back. All innovations are for creative destruction of the present that the market would decide as to the longevity of the innovation. In this case CSR will surely outlast any other innovative output from the company.

IBCM is the study of ‘Cost Consequence’ as at each stage during creative and action process every substance is watched. In the event of an operating loss on account of any account the study of cost consequence enables the company to know well in advance as to the chances of a failure much before the bubble bursts. CSR 2.0 in particular should encompass this clause of ‘Cost Consequence’ so as to mitigate the risks factors by an inclusive HACCP of Governance.

3. Understanding CSR

AAP: I will not be the one to re-invent a definition for CSR ; many authors have tried and I’m not sure if they ever reached agreement…Thus, the big CSR debate is not about whether or not a lot of money is donated for this or that cause; the CSR debate has to do mainly with the internal processes that guarantee that things are done in the right way.

IBCM: International Accounting Standards IAS 38 Intangible Assets – [1998] – had gone through several stages of discussion to Exposure Draft and finally emerging as a standard, had not defined what is ‘Intangible’ a part of the heading at any point of time during its journey. IBCM analyzes and concludes Financial Crisis of 2009 have a lot of bearing on Intangible Assets sucking in the funds from the market for unproductive speculative business. It is imperative therefore the word CSR is rightly defined and understood by all. The reason why it does not happen that many differ in their interpretation of CSR in particular or several such jargons, that shall be so called until these terms are defined, such as Human Capital, Intellectual Capital, Knowledge Management etc. is because there is no central institution to govern and issue standards as IASB/IFRS does for Accounting terms. IBCM’s purpose is to establish IESB – International Ethical Standards Board – that shall be formed with Corporate and UNGC initiatives that shall function through their affiliates globally as a statutory body in each country. CSR till then will remain a jargon subject to the tossing up by any.

4. The globalization process as the cause of CSR

AAP: In order to understand the role of CSR .. it is necessary to understand the globalisation process itself, which places major multinational companies in a global ‘theatre of operations’ (The Economist, January 17, 2008)…Today, this pressure has yielded results; many multinational companies have already implemented ethical codes and principles in which they voluntarily commit themselves regarding levels of transparency, social and labour rights, environmental impacts, etc., beyond what is required by local legislations. Therefore, in practice when we read that company X has implemented an ethical code, it is CSR we are talking about.

IBCM: The 4 issue areas as indicated by 10 Principles of UNGC, Human Rights, labour, Environment and anti-corruption are the pillars of the edifice called Humane Society around the world. IBCM has analyzed the corruption scenario starting from Lockheed scandals in 1976 to formation of FCPA, OECD and UNCAC. In 2007 Joseph Murphy commenting on the [Mr. Joseph E. Murphy (Corporate Compliance and Ethics Professional):] Review of the OECD antibribery instruments: compilation of responses to consultation paper: 31 March 2008,: Quote: One need only look at the record at Siemens (whose code of conduct was described as the ―read, laughed and filed code), or the long, legalistic (and ineffective) code that existed at Enron to see the great danger in such sweeping conclusions, referring to OECD’s conclusion that large multinational companies generally have adequate internal compliance controls. Unquote. These 10 Principles of UNGC, that can be represented by the jargon CSR, have to be instituted in every ‘Theatre of Operations’ globally with a single standard applicable to all.

IESB – International Ethical Standards Board is the answer. This will work in the same fashion as Institutes of Chartered Accountants training and creating half-a-million professionals around the world certifying the public officials and corporate managers.

5. Socially-responsible investment indices as CSR drivers

AAP: But maybe the big bang of CSR in major multinational companies has coincided with socially-responsible investment indices, namely those involving a set of listed companies which, after being analysed, show that in their global operations they maintain ethical behaviour in three areas: social concerns, the economy and the environment.

Among these indices, the most prominent is the Dow Jones Sustainability Index (DJSI), which has become, in some ways, a responsible management influence for four reasons:

• Firstly, because it expressly says that a company will be sustainable in the future if it is capable of reconciling the ‘triple bottom line’: economic, social and environmental.

• Secondly, because the relative importance of each ‘account’ is weighed. For example, if we analyse the telecommunications sector, we see that, in 2008, economic aspects weighed 41.6 percent of the total; social aspects, 40.6 percent, and environment 17.8 per cent.

• Thirdly, the most relevant for me is to see what the DJSI includes in its chapter Social Aspects. If chart 1 is analysed in depth, you will see that ‘the social aspect’ includes things such as internship, development of human capital, talent attraction and retention, knowledge management, supply chain assurance, dialogue with stakeholders, social reporting, the social impact of products and services and inclusion. Interestingly, ‘the social aspect’ also includes the concept of philanthropy, which, for the Information and Communication Technology sector (ICT) weighs… 3 per cent of total responsible behaviour! Note that we are talking about 3 percent, which means that the remaining 97 percent of a company’s responsible behaviour has, for the DJSI, nothing to do with those social projects that were historically designed for ‘giving back to society what society has given to us” (see charts 1 and 2).

• Finally, because the importance of every ‘dimension’ of the DJSI is updated year by year, based on public policy priorities. Therefore, we see in 2002 the economic dimension weighed nearly 52 percent, whereas in 2008 its importance decreased to 41.6 per cent. In contrast, the social dimension has gone from 24 (in 2002) to 40.6 per cent in 2008. My forecast is that this crisis will change, since it couldn’t be otherwise, the relative importance of each percentage.

However, even though the DJSI provides clear criteria on how to measure responsible behaviour, there are authors who don’t consider the idea of the triple bottom line as useful at all.

Chart 1

Chart 2

IBCM: Chart 1 & 2 is the sustainability index between 2002 and 2008 of a sector of industry viz. telecommunications. Firstly, this index is of 2008 while we study it in 2011. Secondly, this does not prove anything.

CSR endeavours to stand by the 10 Principles of UNGC providing an assurance to the public that the company in question follows a set of rules to the benefit of the society. Primary concern is therefore for the charts to communicate to the people how the company is giving an assurance to them on the 10 Principles. Public is like a passenger in an aircraft who is provided with the video display of the real-time information on the flight path, a map covering the route, the position on dot, altitude, cruising speed, distance to destination, time from origination point and time to reach the destination. The passenger is given the assurance on the Governance aspects of the flight thereby giving a level of confidence while flying. When the captain announces the likely turbulence the passenger willingly clicks the safety belt without any murmur.

DJSI – should be modified to provide an online information on the aspects of Governance on the stated areas for each company. The economic, social, environmental data by way of ratings as to the performance must be comparable with one substance and the other, be it IBM or DP or Harvard University. CSR should look into the comparability so that efficiency between one and another is thrown out to the public domain to have the knowledge of the company’s commitment to the 10 Principles of UNGC. IBCM defines: Governance means: a. Real-time Monitoring, b. Cost Consequence and c. People Participation.

CSR, to reiterate must reflect the cost consequence aspect of not adhering to the 10 Principles of UNGC. CSR should challenge DJSI as to its usefulness in the present form as to whom it provides the benefit, if at all there is.

6. CSR 1.0, a communicative response

AAP: In view of this muddle, which has been the response of companies? In my opinion, multinational companies, in general, and big Spanish companies, in particular, have carried out their duties well. Today, Spain and its companies are leading many world CSR initiatives: we are at the top of the ranking of countries signing the UN’s Global Compact;

This situation has triggered the fact that CSR has been top-down managed, particularly emphasizing aspects which are linked to communication, institutional relations and company image. Nearly all major companies have worked on six fronts: a) reporting, through sustainability reports or memorandums, ,following more or less internationally-accepted standards (GRI); b) international presence in the major sustainability indices, such as the Dow Jones Sustainability Index (DJSI) and FTSE4Good; c) the active presence in associations, forums, debates and work teams created for consolidating CSR; d) social action, namely, the development of social sponsorship and philanthropy projects; e) the preparation of ethical codes as a formula for implementing a transparency and responsibility culture; and f) multistakeholders dialogue groups, which usually focus on the value of those sustainability reports or memorandums. Companies have developed all this more or less successfully, and that’s why we have usually been reading news about the implementation of an action code, the publication of a new report on CSR or a survey in which the reports are compared, or the investment in this or that charity initiative, etc. However, this model – which could be called CSR 1.0 – is not going to make it possible, in my opinion, to make a qualitative leap forward. And it is not going to be possible because it is still embedded in a superficial layer of the organizational culture, and is more linked to marketing and image.

Therefore, the challenge is to go from CSR communication to CSR management. Namely, to bundle everything the company does – and to talk about it – is a good thing; developing social projects is good; producing ethical codes in order to incorporate them into the company’s ‘normative law’ is good. The problem is that, even though it’s good, it is not enough. And it is because all these things are in the most visible (or cosmetic) layer of organizations and they hardly reach internal procedures of companies, as Frank Dixon said (2007). Failing to take this step simply implies that the CSR is seen as a cost and, therefore, it can be reduced in times of crisis.

CSR 2.0 as new driver of growth CSR 1.0 has made it possible to make remarkable progress, but I’m afraid that the battle has not been yet won. If it had been won, we wouldn’t be having opinions expressed such as the ones I’ve mentioned at the start of this article. The challenge, as I said, is to go from communicating to managing. Managing entails answering some questions: to what extent can CSR generate more income? And reduce costs and minimize risks? And impact on margins and customer satisfaction? And improve the work environment? This change in pace has already been called by some of us CSR 2.0.

In its last survey, the consultancy posed to the 50 major European companies the following questions: Do companies integrate in their strategy CSR where it adds value to business? Do they dialogue with stakeholders? Do they work on a materiality process in order to define the relevant issues for society and business? What issues are they considering? Do they consider they are evolving from CSR 1.0 to CSR 2.0? According to this firm, companies such as Basf, NestlŽ, Royal Dutch Shell, Telef—nica, Vodafone and Volkswagen, among others, have already taken this step. ÇWe could call it Global Compact 2.0È, he said during his intervention in the World Economic Forum after taking stock of the ten years of operation of the World Compact, which, according to the United Nations, already includes 6,000 companies in more than 130 countries.

IBCM: Noted the process evolving from CSR 1.0 Communication to CSR 2.0 Management. IBCM defines the creative process of substance in 6 stages. 1. Quiescent, 2. Conceptualization, 3. Communication, 4. Formation, 5. Formulation and 6. Creation of a substance. Accepting CSR 1.0 in stage 3 i.e. communication, CSR 2.0 has to go through the process 4 to 6 before it could be called a substance of Quality. Once it becomes a substance then Action Process. The Action Process is the management process, like a plane test flighted and ready for carrying the passengers. If it tries to fly without fully being created as a substance, it will be a failure. CSR must note that every financial catastrophe is only due to the management of an ill-prepared substance be it for mortgage or hedge funds or defence contracts pushed into operation without creating a qualitative – Cause & Effect phenomena. CSR 2.0 has to go a long way before it can fly.

7. Some conclusions

AAP: The times we live in are not easy. That’s why I believe it is necessary to link, more than ever, CSR to financial statements. The questions are clear: To what degree can CSR generate more incomes? And reduce expenses or minimize risks? And have an impact on margins and customer satisfaction? And improve the labour climate? However, the answers are not always evident.

IBCM: UNGC is a commitment to adhere certain principles in order for Corporate Sustainability within the society that UNGC hopes to create. That commitment should be seen in form of a separate Statement of Accountability that CSR shall create and provide to the public for study on a daily basis. As and when it is displayed for public to see per Article 10 Public Reporting the Financial Statements be merged into it as part of the Statement of Accountability and not the other way as CSR suggests.

IBCM thanks Alberto Andreu Pinillos for providing his article to me. He is welcome to clarify any statement that I have made here.

Jayaraman Rajah Iyer

PS: I have placed the article: CSR 2.0 Competitive Advantage for the Future, by Alberto Andreu Pinillos, Global Director of Reputation, CSR, Brand and Sustainability, Telefnica SA., at http://bit.ly/dKZ7VO that you may access to have full account of Alberto’s version. For my own comments further information on my theory is available from this blog including synopsis of my book. Thank you for visiting, please do leave your marks hereunder.