of Globalisation: The Flaw of the ‘Business Case’
I intend to set a scene outlining the challenges faced by the corporate world today, to challenge some aspects of current conventional wisdom which I believe impede solutions, and then try to contribute to the forming of an agenda.
The scene is likely to be familiar to many, if not all. But I believe its repetition is important because the corporate world has greater unfulfilled potential for improving the problems we confront today than any other sector of society, even perhaps including government. Moreover, it is a scene which, however much we here may accept it, others do not and there is therefore an intellectual battle to be won.
If I had anything that might be dignified as a thesis it would be as follows. Developments since the ending of Communism have fully exposed the contrast between the rich and poor of the world, between the prosperous and the deprived, oppressed and exploited.
It is an unsustainable world by any measure - political, economic, social and environmental. Whatever the proximate causes of the terrible events of September 11, they should emphasise for us all the urgency of the challenges we face in trying to improve social and economic injustice.
These challenges require a constructive response from governments. They also require a response from companies. Whether they acknowledge it or not, companies have greatly increased their influence as the growing internationalisation of the world economy has diminished the power of governments and made the public limited company the most significant part of the world economic bloodstream.
Companies are today the prime source of nations’ financial wealth. But they cannot and should not be called upon to change the world on their own or to do the job of governments. But their collective effort could immensely assist in alleviating problems and in diminishing inequalities, not through benevolence, charity or philanthropy, but through their operations being conducted in accordance with agreed values and principles. Which can be done without breaching the legitimate boundaries of corporate responsibility.
The point of departure should be these values and principles.
Instead, we appear to have chosen to pursue change by arguing the ‘business case’ for appropriate behaviour and by promoting the concept of ‘corporate social responsibility’.
The first, though a valid tactical weapon, is in principle a cul de sac, leading nowhere, part of the problem, rather than part of the solution.
The second is so confused in its definitions, chiefly implying that it is simply an added ingredient to an otherwise unpalatable dish, that it has managed both to increase cynicism on the Left of politics and provoke mockery on the Right.
Without radical re-thinking, without a new paradigm or framework of thought which puts values and principles as the point of departure for all commercial activities, without a more open approach to the role of law, I believe we set at risk the mechanism of capitalism and the market economy, for which at present we have no practical alternative. Financial failure can destroy individual companies, moral failure will destroy capitalism.
I can, if you wish, stop there, but having stated my conclusions I should perhaps now try logically to reach them. Globalisation is the cliche of the moment. It is irrationally demonised as the source of all our ills; uncritically proclaimed as the solution to them. Yet in principle there is nothing new in it. The internationalisation of the world economy has been growing steadily for decades.
But, like all cliches, globalisation reflects a reality - a significant difference of degree and an acceleration in the pace of change. There is no agenda today which does not explicitly or implicitly have globalisation on it.
For the corporate world it has meant significant increase in opportunity and influence. It has also meant growing threat and risk. This will be familiar ground, but let me briefly expand it.
The shift of power or influence should be obvious, though there are Right-wing economists who assiduously deny it. The removal of ideological and political barriers to private enterprise has led to investment where none was possible before, nowhere more markedly than in the exploitation of oil in countries of the former Soviet Union.
The supermarkets and consumer goods industries spread their supply chains ever wider and deeper into the developing world. Privatisation is the only game in town. Governments of north and south compete for the skills, investment and access to markets that the transnational company can offer. The choice between centralised planning and a market economy has gone. Loss of choice for governments means loss of power. But many governments are also diminished by their lack of any representative legitimacy, and by the prevalence of corruption, internal conflict and human rights violations within their countries. Companies have seized the commercial opportunities which they understand. They are confronted by risks and threats that most as yet do not. With the demise of Communism, capitalism and the market economy have lost their best ally.
So long as the inefficiency of central economic planning remained as a comparison, the manifest economic superiority of the market economy obscured its social defects. For companies this was not the end of history, as Francis Fukuyama would have it, but the beginning. Their total impact on the societies in which they work is now fully exposed.
Environmental and social failures have become increasingly visible through periodic disasters (Bhopal, Exxon Valdez, Brent Spar, Nigeria, Colombia). Campaigning NGOs and the all-seeing eye of the internet leave no hiding place. In a world of social injustice, economic inequity, environmental degradation, conflict and human rights violations, people are asking more clearly than ever before what the role of companies is in this scene.
Does their growing influence make the world better, or worse? The truth is it does both. I won’t take up your time spelling out the benefits of the current system other than briefly.
The first is self-evident. Here we sit, warm, well-clothed and well-fed, with all the benefits of modern technology - the beneficiaries of the system, like so many others in the richer countries of the world and in the wealthier sectors of all societies. Secondly, international trade is in principle an essential component of a better world. Thirdly, democracy needs a market economy if it is to thrive.
With these benefits comes concomitant harm, or, in the language of the day, collateral damage - to individuals, to communities, to the physical environment - reflecting a gap between the practice of business and the contemporary values of society. Again, there is nothing new here. The disconnection between business and society’s values is as old as the company. The abolition of the slave trade and the introduction of the 19th century Factory Acts were both opposed by business on the grounds that they would be injurious to commercial interest and to the nation’s prosperity. They were fought for by what we would now call pressure groups. (Indeed Anti-Slavery International, whose work is still sadly needed today, is the oldest of all the NGOs). More recently we have seen similar attitudes to the protection of the environment, to the introduction of a minimum wage in the UK, and to corporate responsibility for human rights - all initially resisted, and in some cases still resisted, by the corporate world. It has long been clear that the interest of every stakeholder other than the shareholder has had to be fought for and imposed from outside the company, not by corporate initiative.
But business has adapted over time, if always belatedly, and the world - or that part which profits from it - has seen the benefits of this remarkably efficient mechanism greatly outweighing its costs. In so far, it must be added, as these costs were known and understood.
The game of catch-up seemed adequate to sustain the role of business. But language tells a tale. If the adjective ‘business-like‘ signifies a degree of approbation for the ability to get things done, the phrase ‘That‘s business’ implies a multitude of sins. And every opinion poll shows that business is trusted no more than journalists or politicians. Profit is believed - and observed - to precede principle.
I do not believe that the game of catch-up under pressure which has characterised the last century or more is any longer adequate. Indeed, there seems to be some recognition of this. Shocks to corporate reputation have made their mark. Issues previously unrecognised as corporate responsibilities are now on the agenda. Language is changing. There is a new vocabulary: ‘Global citizenship‘, ‘sustainability‘, ‘corporate social responsibility‘ are now buzz words. Business ethics is an academic industry. Conferences on the subject abound. Consultants thrive. Codes of conduct proliferate.
All of which should be accounted a good thing, if it really meant that there was a collective corporate response to the challenges companies face. As yet I doubt it. The aim must be to see that the benefits that corporate activity brings is not at the expense of harm. The link between business and an unsustainable world must be values translated into the manner in which companies conduct their operations. This is the fundamental challenge today. But it is not the challenge that is being met. Instead, it is the ‘business case‘ and ‘corporate social responsibility‘ which have taken centre stage. Both I believe are profoundly misguided.
Let me be clear that I am not talking of the economic justification for sustainable activities, but of the currently popular use of the ‚business case’ as a reason for moral behaviour. There is of course a business case for doing right: it is fundamental to reputation . But as a point of departure, as a justification for doing right, it is, as I have already said, part of the problem, not part of the solution.
It is a rationalisation, not a justification. It is nothing to do with right and wrong. Indeed it is wholly devoid of any concept of right and wrong. It argues that ethical behaviour has to be justified by its financial reward. Sure, we all use it to sustain our arguments. But we need to recognise that it is fundamentally an amoral concept: It argues that a company should not do right because it is right, but because it pays. It may indeed pay, though it is casuistry to argue that reward always follows. And historically, as I have already said, business has argued that doing right - whether ending the slave trade or protecting the environment or, more recently, introducing a minimum wage - would not pay. Moreover the ‘business case‘, unlike principle, is an impossible guide to the many decisions that a manager faces in real life.
Principle and profit are of course not antithetical, as Shell pointed out in its first ground-breaking social report. But unless principle precedes profit - in other words you don’t accidentally kill or poison people in your employment because it’s bad for business, but because it’s wrong - public suspicion of business is understandably reinforced. Moreover people will go on being killed and poisoned. Indeed, there is an arguable business case for bribing, lying and polluting if you can get away with it, as many have and can and do and will.
Contrary to the weight of corporate opinion, there is a far stronger business case for law and regulation to underpin good behaviour if you believe in a level playing field and in the market. I can give Pete Sampras a game on my local vicarage tennis court, but not, I suspect, at Wimbledon. It pays good companies not to be undercut by the unscrupulous. The market requires data and disclosure if it is to work.
If companies really believed in the market, the best of them would be in the forefront in arguing for disclosure of data on aspects of company performance other than money which are critical to a company’s future. But they don’t, and it is left to the NGOs to do so. In sum, the ‘business case‘ is a cul de sac, going nowhere.
Then we have the now popular concept of corporate social responsibility (CSR). It is a concept unique to business, implying that, unlike any other legal activity, social responsibility is not inherent in what it does. Yet providing good services and products is a social responsibility, so is making a profit. CSR may be a necessary purgative to shift constipated thinking, but it too readily gets treated as a add-on , as charity or philanthropy, or even a marketing ploy, rather than something that should pervade the whole of a business and be embedded in the core of its thinking and practice. Indeed the first report on social responsibility of the World Business Council on Sustainable Development talked of business ‘giving back‘ to society through CSR - an astonishing confirmation of parasitism!
It also talked of adopting a ‘CSR strategy‘, as though this was something with which one cloaked what were otherwise anti-social activities. The EU Commission’s Green Paper on CSR is simply a muddle of conflicting definitions. And now, at the other end of the scale, we have Professor David Henderson’s elegantly argued book, Misguided Virtue, lampooning as ‘global salvationism‘ the more grandiose claims for CSR which emanate from the mouths of many CEOs and from the CSR industry.
If we are stuck with the terminology of CSR, as I fear we may be, let us agree a clear definition - that it should be defined as the responsibility of a company for the totality of its impact, with a need to embed society’s values into its core operations as well as into its treatment of its social and physical environment. Let us define it as encompassing a spectrum - from the running of a profitable business to the health and safety of staff and the impact on the societies in which a company operates.
At the heart of all this muddled thinking (and indeed at the heart of Henderson’s lucid analysis) lies a fallacious definition of the purpose of a company - that it is to provide value to shareholders (which simply means money, but sounds grander) or make a profit. It is a fallacy promoted by business schools and by CEOs (not least by John Browne of BP in a talk in Cambridge earlier this year); it was cited in the first consultation paper on UK company law reform and in the EU Green paper on CSR. It was a fallacy bolstered by the ethos of the 1980s and ’90s when Milton Friedman and Margaret Thatcher enshrined money as the goal and measure of all things.
It was exemplified by a wave of take-overs and mergers based on an assumption that companies were simply properties to be bought and sold. Here we saw the new barbarians. Like the Conquistadors melting down the finely wrought artefacts of the Aztecs and Incas simply for the value of the raw gold they contained, the take-over merchants measured the complex organism of human skills, technology, ethos, and loyalty which make up any good company - let alone its stakeholder commitments - simply in terms of money.
Such a definition of purpose is an aberration in principle and practice to any responsible manager. The first Henry Ford said: “Business must be run at a profit, else it will die. But when anyone tries to run a business solely for profit, then also it will die for it no longer has a reason for existence.” In other words the purpose of company is about providing goods or services profitably and responsibly.
It is the word ‘responsibly‘ which lies at the heart of the debate. It is about doing right, not doing well, which is the business case, or doing good, which incurs the just charge of global salvationism. But doing right should lead both to doing well and doing good.
What we require are:
We need new managers with broader horizons. We need new business training - an MBManagement, covering the breadth of today’s responsibilities, rather than an MBAdministraion. We need the constructive involvement of companies in the debate.
I have so far begged the fundamental questions of What is ‘right‘? And what are appropriate values?
First, I do not believe that a company can successfully operate in the long term with practices that offend the individual consciences or conflict with the individual values of those who work for it. But many try, and this may be too subjective a measure to enshrine in practice.
There is today a plethora of codes of practice and similar initiatives of which the most notable is the UN Global Compact. These are useful in creating a climate of awareness and for stimulating a response from companies which might otherwise stand aloof. But they have no teeth and the profusion allows companies to pick and choose those that suit them best or to plead ‘code fatigue‘ as a pretext for inaction. What needs to emerge is a set of comprehensive and authoritative principles applicable to all.
The basis for this already exists. The international framework of values and principles comprising the United Nations Universal Declaration of Human Rights, the Convention on the Rights of the Child and the core conventions of the International labour Organisation is the obvious starting point. It is on the basis of these that the UN Commission for Human Rights is currently drafting Fundamental Human Rights Principles for Business Enterprises.
This is a comprehensive document, covering the whole of a company’s responsibilities. It should, when agreed within the UN, provide a template, with the authority of the UN behind it, against which companies can evolve their own codes of practice. It could ultimately form the basis for international regulation which is undoubtedly going to be essential if the internationalisation of the world economy is to progress without conflict and if it is to do the good claimed for it.
A radical change of approach is required - doing right because it is right, not because it pays, with principle, not profit, the point of departure. There does have to be a choice about priorities.
Governments also have a crucial role in encouraging corporate responsibility which they are not playing The weakness and corruption of many governments in the world today pose particular problems and dilemmas for the best-intentioned companies whose solution lies outside their direct competence. Even in Europe, indeed in the UK, governments have yet to play an adequately intelligent and constructive part in encouraging appropriate corporate behaviour.
But companies are in many ways closer to communities and individuals than governments; they touch more people’s lives more intimately. While they cannot and should not be expected to transform the world, companies can, without transgressing the proper boundaries between business and government, help to shape a better society - and possibly better government - by the incorporation of values into the totality of their operations. This should be our point of departure and our goal.
The profitable long-term survival of companies in the world as it is today - visible islands of prosperity in a sea of poverty - seems to me an unlikely scenario if there is no change. I repeat that companies cannot transform the world on their own. But if they can transform themselves, both they and the world will have a better chance of peace and prosperity.
is the challenge we face.