Ethical cleansing

Corporate social responsibility is rising up the business agenda, but firms
have been slow to use HR to deliver sound corporate values. But in an
increasingly socially and environmentally aware world, how can personnel
professionals help companies to promote ethical behaviour to maximise their
global brands? Stephen Overell reports

The Prince of Wales International Business Leaders Forum has a
grand-sounding mission. "Our vision of CSR [Corporate Social
Responsibility] is open and transparent business practices that are based on
ethical values and respect for employees, communities and the
environment".

Set up by the Prince of Wales and several concerned chief executives in
1990, the London-based forum promotes ethical behaviour among companies and
encourages thought for the economies and communities in which they operate.
"Membership of the IBLF is a practical demonstration of a company’s
commitment to pursuing responsible business practices," its website
proclaims

Yet some of the members of this network of 65 of the world’s most powerful
companies might raise a few eyebrows. There is GlaxoSmithKline, which led 39
pharmaceuticals companies in a three-year battle against the South African
government in a bid to protect the prices it charged for anti-retroviral drugs
used in the treatment of Aids, a disease threatening to affect 20 per cent of
the South African population. In a settlement, earlier this year, the
pharmaceutical industry was widely held to have lost.

Then there is BMW. In 1999, the German prestige car manufacturer took up
Tony Blair’s offer of a £140m tax break to keep open a facility for Rover at
Longbridge, in the Midlands. Eighteen months later it pulled out, selling the
loss-making Rover – known internally as "the English patient" – for
next to nothing.

The network also boasts Chevron, the US energy giant. In 1998, the company
admitted it had transported Nigerian military and police, who shot and killed
community activists protesting at the Parabe oil rig in the Niger Delta.

Then there are Rio Tinto, Shell, Enron and Coca-Cola, all busy trying to
patch up their reputations after long periods of dominance on global human
rights and environmental charge-sheets.

Critics of the way business claims one thing and does another in the field
of social responsibility do not have to look hard to find instances of, at
best, rather liberal interpretations of espoused principles and, at worst,
downright hypocrisy among the IBLF’s membership. Conveniently, the airy phrase
"socially responsible business practices" can mean anything and
nothing.

But Aidan Davy, director of corporate services at the IBLF, says it is not
the purpose of the network to represent its members to the world, nor police
their actions. It is rather to help them fulfil a genuine commitment to
continuous ethical improvement. "We enjoy a healthy working relationship
with our members and can be constructively critical in private," he says.
"The motivations that drive companies to move towards social
responsibility often involve difficult experiences. We are not an exclusive
club for lily-white companies with bulletproof reputations. At any one time
dozens of our members will be actively campaigned against, but it does have to
be stated that often the reporting of these things can be woefully
one-sided."

The IBLF does not have sanctions against its membership, nor has anyone ever
been evicted. But there is periodic re-evaluation of the group’s seriousness
about ethics. "We don’t look to measure their commitment in a forensic
way. Quite often you get to see a kind of internal graduation in commitment.
Reputation is often an entry point for becoming interested in social
responsibility, but over a period of months you get to see a transformation as
people come to understand the case better."

This point is symptomatic of the subjectivity that blights much of the
debate surrounding CSR and business ethics. There is no simple definition of
what socially responsible behaviour is and, as a consequence, companies can
have immense difficulty with the issue. A company which boasts or shouts about
its position on various issues can find itself hoist on its own petard in other
areas of its business; equally, and frustratingly, it can find its commitment
seen as nothing more than a cheap marketing gimmick. Yet a company that is
quiet about its charity work can miss out on the favourable gloss a reputation
for good corporate citizenship can bestow on a brand. Further, one company may
believe behaving ethically simply means obeying the law in any given country.
Others will argue that a reputation for social responsibility necessitates
going beyond the letter of the law to take up a pioneering stance that people
would not expect from commercial organisations, as traditionally conceived.

As an illustration of the complexity, consider the case of shoe retailer
Clarks. The company began as a Quaker cobbler in Somerset in 1825, and today is
one of the few remaining firms keeping the Quaker conscience alive, with Clark
family representatives on the board, still asking awkward questions about
progressive employment practices, health and safety and employee share ownership.

Chief executive Roger Pedder says, "There is a durability in the Quaker
company based on its attitude to business. Quakerism is a moderator of
behaviour – the desire to be consensual, to work out a durable solution to a
proposition, gives it a sort of serenity. There is no get-rich-quick mentality.

The Quakers say they are stewards of wealth. But some might say there is a
tension between social responsibility and doing what is economically and
commercially right."

Shoe-making, however, is not the easiest arena in which to stitch a social
conscience. It is no longer productive to manufacture volume shoes in Britain
and, as a result, Clarks is no longer a shoe-making business at all, but a
retailer and wholesaler owning or franchising shops and importing shoes. Six
years ago, 75 per cent of shoes were made in Clarks factories. Now it is less
than 25 per cent, with 40 per cent of the business based overseas. Yet the
figures tell a tale of the traditional Quaker distaste for redundancy – in 12
years the company has shut down two-thirds of UK manufacturing while reducing
employees by less than 10 per cent (18,000 down to 16,500).

"The dynamics of the marketplace has been that shoe-makers migrated to
the lowest cost of dexterous, manual labour – Germany, for instance, has no
indigenous shoe-manufacturing," says Pedder. "It took us a long time
to face up to the fact that manufacturing shoes was not a viable activity here.
But Quakers are practical people and we said ‘where is the greater good?’ A
buoyant Clarks is better than a limping Clarks."

Two years ago concern arose about exploitation of workers at a Taiwanese
supplier. So a delegation, made up of senior managers, went to investigate.
They came back with their minds at rest. "You might not like the long
hours, the segregation or the dragooning, but it was hard to argue over the
cleanliness and high standards – there was a sports complex, leisure
facilities, a lover’s nook. Given that society, we were satisfied in our own
minds that the pay was good."

In situations involving overseas suppliers there is always a balanced
decision to be made about labour standards. HR people who investigate may be
certain that within the context of a particular labour market, standards and
quality are impressive. But as comedian Mark Thomas has enjoyed asking several
squirming executives, "Would you like it if your daughter worked
there?"

Such subjectivity has helped to confuse attempts to nail down a definition
of CSR. The Industrial Society’s version reads, "Corporate social
responsibility is the continuing commitment by business to behave ethically and
contribute to economic development while improving the quality of life of the
workforce and their families as well as the local community and society at
large."

Nigel Tuffrey, director of the Corporate Citizenship Company, a London
consultancy, argues there will never be an agreement about what a
socially-responsible company has to do.

"The different interest groups have their own views. There is no tablet
of stone. It is still the most fluid of debates. Governments are having their
say as well as the multiplicity of pressure groups. An individual company has
to find its own way. It will have a mission and a set of values, but how it
lives out its values in practical way, that is a matter of debate. The priority
may be different in each workplace."

Yet the fluidity of the concept has done little to stop CSR dramatically
rising up the business agenda. Some 58 per cent of FTSE 100 companies report on
social or community issues, while three-quarters of occupational pension fund
holders want pension funds to exercise their influence on companies to further
socially responsible aims. Behaviour standards and codes of conduct
proliferate. In addition, the stakeholder debate has transformed attitudes to
corporate governance. In 1998, a study of the chief executives of the
"world’s most respected companies" tried to ascertain the attributes
that would guarantee respect in the future. The chief executives placed
"strong and consistent profit performance" only fractionally ahead of
"robust and human corporate culture". The Institute of Directors
identified "honesty and integrity" as the most vital personal
characteristic for appointments to a board in its Sign of the Times report.

The initial view of many businesses that incorporating stakeholders and CSR
into the traditional objectives of a business might "confuse"
agendas, has made way for a growing feeling that a strong policy on CSR can
provide tangible shareholder benefits. In 1999, the IoD’s Ethics in Business
survey identified that many boards are giving priority to stakeholder
interests. The survey found very mixed views about the statement, "We see
shareholders’ interest as our first priority". Although 42 per cent agreed
to some degree, 27 per cent disagreed completely. Meanwhile, well over 85 per
cent agreed with the statement, "We try to devise policies which take
account of all stakeholders."

However, few directors feel compelled to take a more diverse range of
interest groups into account when making business decisions. This was also the
view of the UK Committee on Corporate Governance, chaired by Sir Ronald Hampel.
The committee’s report concluded, "To redefine the directors’
responsibilities in terms of the stakeholders would mean identifying all the
various stakeholder groups; and deciding the nature and extent of the
directors’ responsibility to each. The result would be that the directors would
not be effectively accountable to anyone, since there would be no clear yardstick
for judging their performance. This is a recipe neither for good governance nor
for corporate success."

That may be so. But the costs of ignoring a perceived demand for action on
CSR could be heavy. Brands account for 25 per cent of the world’s financial
wealth, according to consultancy Interbrand. This was the motivation that
prompted the Body Shop to stop using PVC in products, packaging and shop-fits.

Body Shop’s brand is known for pioneering corporate concern for the
environment – "Our concern about the social and environmental implications
associated with PVC overrides any decision to use it," Nicky Amos, head of
business ethics, says.

The view that CSR is essential to protect vulnerable global brands is
widespread. Events at Davos, Seattle and Genoa have brought home to politicians
and business leaders alike just how unpopular globalisation is among certain
sections of society. Strategy guru Michael Porter said in a recent speech at
London Business School, "In a more socially and environmentally aware
world, corporate responsibility in these spheres will itself be a source of
competitive advantage." But yet again, it is complicated – many brands in
tobacco and oil production seem to have weathered a sustained assault from NGOs
with little apparent damage to profitability; Erin Brokovich has not finished
off Pacific Gas and Electric.

There is a substantial body of evidence to suggest ethical considerations
affect people’s choice of employer and brands – although such surveys are
notoriously fickle. According to the Industrial Society, 82 per cent of
professionals would not work for an organisation whose values they did not
believe in. Over half chose their employer because they believe in what it
does, and almost everyone – 99 per cent – cares if their organisation acts
responsibly.

Among small businesses, 62 per cent said employees were most likely to
encourage them to be socially active, while 61 per cent said they would be most
influenced by the law. The society argues that such findings challenge the
prevailing wisdom that bases recruitment and retention strategies on pay and
benefits.

Its report, Corporate Nirvana – Is the Future Socially Responsible? states,
"The potential for near full employment in the UK, combined with increased
competition and the need to cut costs, is putting pressure on companies to
become ’employers of choice’. Of course pay and development will continue to
take precedence in people’s choice of work – especially for people earlier on
in their careers – however, the job seeker’s market means that these can often
be taken as a given and other priorities such as ethics and reputation play a
more important role."

A study published in July by US consultancy Hill and Knowlton found that 79
per cent of Americans take a company’s attitude to corporate citizenship into
account when buying a product. A clear majority would also buy the stock of
socially responsible companies, even though accepting lower financial returns.

Yet few people actually see US companies as ethical organisations. Less than
2 per cent of respondents perceive US firms to be good corporate citizens. They
see participation in charitable activity as being motivated by a desire for
good publicity. Fewer than 25 per cent believe companies donate time and money
to charitable causes because they are truly committed.

The question of motivation is an interesting one. Does the reason they do it
matter if more companies adopt socially responsible business practices? Michael
Littlechild, chief executive of GoodCorporation, an organisation which operates
a badge of social responsibility for companies, thinks not. "It is the
result that is important. A number of organisations come into this area because
of a strong personal commitment, but there is no doubt reputation is a lot of
it. The point is that they should do it seriously."

But Littlechild argues that ultimately ethical behaviour is of direct
interest to businesses. "More companies understand that not following the
short-term path to success can be in their interest. Most people believe that
being ethical is a long-term position and will greatly help the value of a
company’s brand," he says. "Therefore it is a good commercial
decision. You may not be taking a decision that is without specific cost, but
in the long term, good community and customer relations are extremely
valuable."

Simon Webley, research director of the Institute of Business Ethics, says,
"The current driver of this issue is fear. But the negative drivers are
often seen as having a positive effect. Firms with stated policies on CSR say
that people enjoy working for a company that has specific standards. You will,
however, get a more sustained commitment if it comes from the leadership of a
company that feels it is an important part of any business."

Article 13 is a London-based social responsibility consultancy (slogan:
"turning obligation into opportunity") which claims that ethical
issues can be turned into advantages for companies enabling them to
differentiate themselves from rivals and build a strong brand. The
consultancy’s strategy involves a combination of detailed knowledge across a
wide range of policy areas – ultra-low sulphur petrol, Working Time
Regulations, integrated product policy, age-discrimination and stakeholder
pensions, for example, and turning these obligations into "good news"
for companies. Labels and brands can be linked to strong social feeling on
certain issues; attitudes of sales staff on social and ethical policy can be an
important source of differentiation from competitors; clients can make
"green claims" and so build a reputation.

But co-director Jane Fiona Cumming says that if companies are alerted to the
issue of CSR for reasons of reputation they cannot be perceived to adopt a
programme in a half-hearted way.

"If people embark on a programme that is all froth and no substance,
they will be found out," she warns. "We would prefer people to want
to do it because they believe in it. But different people come to this issue
for different reasons and their attitudes can change as they do it. They can
treat it as a compliance issue, or take a positive attitude and go for
something innovate that can unlock a competitive edge."

Corporate attitudes to CSR are inevitably much conditioned by, and perhaps
even inspired by, the media. It will be the media that sets the standard for
what is expected of companies on CSR – and polices its impact. Yet analysis of
how the media reports on the issue paints a complicated picture. Communications
research group Echo examined 430 articles on CSR published around the world in
2000. It found that organisations which operate across several markets attract
the most recognition for best practice in the CSR arena and see it as a licence
to operate in a competitive world. Yet there are distinct differences in the
way different countries approach CSR. In the US there is a long tradition of
philanthropy. In Japan, CSR is seen as an extension of a lifelong
responsibility for employees.

The key benefits of CSR for companies are employee motivation and retention,
improved reputation and – through dialogue and engagement with their
stakeholders – better issue management. However, the risk of not being seen to
tackle the question of CSR also emerged strongly. International anti-capitalist
demonstrations, the use of the Internet as a propaganda tool and a media
ever-hungry for transgressions underlined the point.

Echo’s report warns companies not to use CSR as a sticking plaster for
deeper underlying problems. It also advises firms not to raise unrealistic
expectations of delivery – causing risks for shareholders as well as damaging
public perception of the company. There are risks, too, in companies not
behaving "all of a piece" – exhibiting socially responsible conduct
in one market, but not in another, such as in the developing world.

Noticeably, short-term interests often seemed to be at odds with longer-term
plans for CSR programmes. But the report is cautious about the link between
ethical conduct and commercial benefit. "There remains a task of
quantifying the benefits, so that ethical balance becomes a measure of
corporate performance," the report says. And Nigel Middlemiss, practice
director at Echo concludes, "The best ones don’t always bang the drum.
Boasting about CSR may not always be the answer. You have to go about things in
a discreet way."

The rising profile of CSR looks unlikely to diminish, if, for no other
reason than the media. Given its slippery nature, however, HR professionals can
perhaps be thankful that although good employee relations is fundamental to
CSR, HR is only rarely given overall responsibility for it. According to the
IBE, just 10 per cent of companies known to have codes deliver CSR through the
HR function. Yet David Grayson, director of Business in the Community, argues
that this does not mean HR is not "very important". "One of the
rising issues on the CSR agenda is work-life balance. Employee stress,
diversity and employee well-being are absolutely critical – they are at the
heart of running a sustainable business."

Grayson warns there is a risk in turning firms away from CSR by
"over-complicating" it. At its heart lies a simple matter, he says,
"What we are talking about is the impact a business has on society and how
to maximise its positive impact and minimise its negative impact."

Worldwide ‘badge’ for standards

GoodCorporation launched in June this year, aiming to be "a global
badge" for corporate responsibility. At its heart is a 21-point charter
covering fairness to employees, suppliers, shareholders, protection of the
environment and contribution to the community. It sets itself apart from other
standards by covering all stakeholders and all companies – small businesses can
become a GoodCorporation as well as huge multinationals, though the costs of
independent verification will mean fees range from about £1,000 up to tens of
thousands for big companies. In particular, the initiative is targeted at being
a "screen" for suppliers – reducing reputational risk in the supply
chain.

To become a member, organisations have to submit to an audit, which involves
talking to employees and suppliers as well as inspecting documentary and
contractual evidence.

On treatment of employees, the charter has eight points:

– Provide clear and fair terms of employment

– Provide clean, healthy and safe working conditions

– Have a fair remuneration policy

– Strive for equal opportunities for all present and potential employees

– Encourage employees to develop skills and progress in their careers

– Do not tolerate any sexual, physical or mental harassment of employees

– Do not discriminate on grounds of colour, ethnic origin, gender, age,
religion, political or other opinion, disability or sexual orientation

– Do not employ under-age staff

As some of these seem vague, or relatively easy to attain, accompanying
material details each clause. On the first point, for instance, about fair
terms of employment, auditors will examine that a termination policy is explicit,
that there is a documented disciplinary procedure and that an employer can
demonstrate that freedom of association and organisation of employees is
respected.

On pay policy, pay differentials and executive remuneration are not part of
the audit. Companies do not even have to pay above the "norm" or pay
premium rates of overtime. "In determining remuneration, a comparison of
local cost of living and pay norms has been made and taken into
consideration", the evidence requirement says.

Stuart Gregory, of Bureau Veritas Quality International, one of the auditing
agencies used by GoodCorporation, says the standard is a "half-way
house" leading companies in the right direction on CSR. "Goodcorp is
a step towards taking companies in the right direction," he says. "It
is giving the right message and relatively easy to achieve. It is a very
rounded approach. But it is deliberately less stringent than other codes in
this area such as the Ethical Trading Initiative Base Code, for instance, or
the Sainsbury’s Principles on Responsible Trading or the SA 8000
standard."

Gregory says that while most CSR codes don’t require evidence of written
systems, documents are a useful guide to how thorough an approach is. "It
is not just the words on the paper but the spirit behind it that is
important."

Typically, an audit, which could last from one day up to several weeks,
depending on the size of a company, will talk to management first. Then, trade
unions if they exist, and if they don’t as many employees as possible – preferably
off management territory. Auditors will also talk with contractors over the
phone, although Gregory says "it is often difficult to get a balanced
view".

ARM Holdings was one of the first 10 organisations to be awarded the
GoodCorporation badge. The company designs microprocessors for mobile phones,
personal computers and hand-held computer games, and licenses its intellectual
property. It does not manufacture anything itself.

Its chief financial officer, Jonathan Brooks, says his company started to
take an interest in CSR because of pressure from institutional investors and
analysts. He decided to submit to the verification involved in becoming a
GoodCorporation because he saw it as a way of clarifying what was necessary in
CSR.

"If I didn’t have this tool, I’d be asking, ‘How far do I have to go?
How much time should I invest?’ We don’t believe in written policies and
procedures for the sake of it. But we do need to reflect our values in all
aspects of our work, and as we have grown this has required the adoption of
formal policies," he says.

In 2000, ARM approached the Institute of Business Ethics, looking for a
model. After joining the IBE, it undertook to become a GoodCorporation. It made
a social, ethical and environmental disclosure in its 2000-2001 annual report.

KPMG and the Swiss inspection group Societe Generale de Surveillance carried
out the three-week audit at three ARM sites in Cambridge, UK, Austin, Texas,
and Tokyo. Auditors examined employment contracts and policies, checked the time
it took the company to pay suppliers, talked to customer support staff about
complaints procedures and looked at donations to charity and community
activity.

Many of the aims were already in operation – not employing under-age staff,
for instance. But the fact that the audit is repeated annually has given the
company an impetus to improve, says Brooks. Targets are now in place for
recycling and energy consumption.

Seaview Hotel and Restaurant on the Isle of White was also among the first
GoodCorporations. Nicky Hayward, the owner, says the hotel, which has only 40
staff, had been practising "corporate commitment and ethics" for the
past 20 years, but "did not want to become complacent".

As well as sourcing locally, Seaview has weekly staff ideas meetings,
encourages responsiveness to customer feedback and recycles waste as far as
possible – including giving away old beds.

Hayward claims a commitment to CSR has brought tangible business benefits.
Staff turnover is 14 per cent (against some hotels, which live with 50 per
cent) and occupancy averages 82 per cent.

Verification through self-certification

Although some initiatives stress the importance of third-party verification,
other codes and standards are based solely on written documents and
self-certification.

The FTSE4Good Index, introduced in July, bases its decisions on annual
reports, websites and information provided in response to a questionnaire from
the Ethical Investment Research Service, a charity aiming to help organisations
with ethical investment decisions.

The index looks at three areas: the environment, human rights and social
issues, such as stakeholder relations

On its launch, of 757 companies in the FTSE all-share index, two-thirds were
excluded, including Tesco, Safeway and the Royal Bank of Scotland – due to lack
of information as much as evidence of poor ethics. Companies involved in
tobacco, weapons and nuclear power were excluded automatically.

An example from the criteria dealing with management systems on equal
opportunities, says companies need to "provide evidence of equal
opportunities systems including one or more of":

– Monitoring of the policy and workforce composition

– Flexible work arrangements and family benefits (at least three of flexible
work time, child care support, job sharing, career breaks, or maternity or
paternity pay beyond the legal requirements)

– More than 10 per cent of managers being women or the proportion of
managers who are women or from ethnic minorities exceeding two-fifths of their
representation in the workforce concerned, or

– Assigning responsibility for equal opportunities policy to a senior
manager.

A separate system that relies on self-certification is the proposal from
US-based Ethics Officer Association, representing 400 multinationals, for an
International Standards Organisation award for global business conduct.

The standard would require organisations to draw up a policy for business
conduct, implement it, assess how well it is working, make improvements and
keep it under review.

According to Edward Petry, executive director of the EOA, the lack of
mandatory certification will not please all stakeholder groups, but he argues,
"We are hoping it will avoid some of the more costly regulations that
might come – and some of the cost and burden of other standards being proposed.
Many of our members feel they have years of experience in auditing and
assessing their own programmes and they can do that much better than most of
the third-party certifiers."

Case study: BP
‘CSR is motivational. It is a licence to operate’

At BP, corporate social responsibility is not perceived as an issue to be
given to any one department or function – there is no one executive "in
charge" of it. Instead, it is treated as the by-product of policy covering
all activities.

The company has five policy areas: ethical conduct; health, safety and environment;
employees; external relationships; and finance and control. On each of these
the company makes a number of commitments and statements of expectation.

For example, on employees, the BP website sets out policies on issues such
as work-life balance, diversity and the number of training days each worker can
expect (five) as well as what it calls the "key people measures" of
appraisal, upward feedback, 360-degree feedback, vacancies advertised and
development conversations. Its section on employee consultation begins,
"We recognise, consistent with local legislation, the right of every
employee to form or join a trade union."

David Rice, BP director of the policy unit, says, "CSR comes out of
what we do. Policies drive the way we behave".

The centre sets out the policy and framework and how it is to be delivered
via a devolved business model. Issues are either covered by performance
contracts between the business units and the centre, or through peer processes
where groups of businesses share an issue or a specific challenge.

Verification is carried out through a system of business unit leaders
self-certifying what they have achieved, while there is also an internal audit
scheme.

"We regard CSR as a licence to operate. It is motivational – especially
among younger employees who do care a lot about these issues. But it is also an
opportunity. Managing down our carbon dioxide emissions has made us money.

"But ethics have never been clear-cut. The whole area is one of
judgement. We tell people to try and avoid making decisions on their own. There
is always someone who can point out something we were doing wrong."

Classical ethics:
Bluff your way

Systematic study of ethics, and the examination of human values, conduct and
goodness, began with Socrates in the fifth century.

His pupil, Plato, in his Theory of Forms, thought that objective standards
of justice and goodness existed beyond the everyday world. Aristotle, by
contrast, argued that virtue is natural and so leads to happiness; moral
virtues are acquired by practice, like skills.

"When devoid of virtue, man is the most unscrupulous and savage of
animals and the worst in regard to sexual indulgence and gluttony," he
wrote in his Politics.

The Cyrenaics and Epicureans were hedonists who believed in the wise pursuit
of pleasure.

The Stoics advocated control of the passions and indifference to pleasure
and pain.

Resources:

Websites
www.ibe.org.uk
www.ftse4good.com
www.goodcorporation.com
www.bp.com
www.pwblf.org
The Prince of Wales International Business Leaders Forum: 0207 467 3600

Books: Business Ethics: Facing up to the issues, edited by Chris Moon and
Clive Bonny, Economist Business Books, 2001, £20

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