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Corporate Social Responsibility and Sustainability Management

Strategy

Presentation to the Symposium of the Business Institute for Sustainable

Development, Seoul, 28 September, 2006

Honourable Chung Sye Kyun, Minister of Commerce Industry and Energy

Honourable Lee Chi-Bum, Minister of Environment
Mr Kim Sang-Hee, Chairperson of the Presidential Commission on
Sustainable Development

Mr Sohn Kyung Shik Chairman of the BISD’s Board of Directors

Mr Yoon Eun-Key Vice President of the Seoul School of Integrated

Science and Technologies

Distinguished guests

I am delighted to have this opportunity to talk to you about strategies for

integrating corporate responsibility and sustainable development into
mainstream business practice. I have been asked to make my remarks of
a practical nature rather than theoretical or conceptual. I am very happy
to this and want to share with the results of recent research I have
undertaken among senior executives in a number of leading multinational
companies. I particularly want to focus on how to develop managers and
leaders with the skills and knowledge required to make sustainable
development a core part of management practice.

Let me begin by outlining the major topics I intend to cover.

First, I want to briefly outline the complex business environment facing

companies today. My point is not to argue why or if companies should
respond to social and environmental challenges – I think we all recognise
that the issues facing society today are so important and so pressing that
companies must act, in concert with government and civil society.

However, if companies are to take action, they must have a clear

understanding of the limits of their responsibility. This is the second
theme of my presentation – presenting a simple framework for
understanding corporate responsibility and sustainable development.

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I then want to go on to explore how companies are defining what this

means in terms of new management competencies – what are the skills
and abilities required to operate effectively in today’s business.

Finally, I will close by considering what might need to change in the way
we train and develop our managers and leaders.

So, let me start by briefly examining the challenges facing us. It is clear
that we live in a changing world. We are facing serious levels of pollution
and the threat of rising temperatures, water shortages and a series of
natural disasters brought on by climate change.
In addition, there are currently more than 2 billion people living on less
than one US dollar a day at a time when the world’s population is rising
rapidly.

Advances in technology are bringing new opportunities but at the same

time this has the potential to further divide society into those that have
access to digital technology and those that do not.

In short, business is having to operate in an environment that is

increasingly complex and uncertain. To emphasise this point, the Central
Intelligence Agency of the United States government highlights the
challenges facing society as we move forward during the next decade.

I believe that issues of globalisation, poverty and environmental

degradation need to be seen as both risks to business, and potential
opportunities. As Kofi Annan, Secretary General of the UN said recently
at the World Summit for Sustainable Development in Johannesburg:

“The main losers in today’s very unequal world are not those who are too
exposed to globalisation, but those who have been left out”

The time is right for individual companies to demonstrate that they

understand the issues facing society and are capable of using their power,
wealth, expertise and knowledge to take action on some of the issues.

Certainly, the need for action is pressing. This next chart is produced by
the environmental organization WWF. It shows the pressure on the earth
resulting from resource consumption. It is our “ecological footprint” that
measures the impact of the consumption of food, materials and energy in
terms of the AREA of productive land and sea required to produce
resources and absorb waste.

It shows data for seven regions in the world. The height of each box
relates to how much resources are being used. The width of each box
relates to the relative size of the population for each region.

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It is clear that environmental improvement does not necessarily come

through economic growth.

If we are to avoid destroying the planet we need to change the way in

which business operates and do so in a way that will support the
population growth that is forecast in the coming years.

And its not just the environmental impact of business that is causing
problems – it is also the social and economic impacts. This quote from the
CEO of a multinational financial services company gives a flavour of the
issue.

However, let me be clear. I am most definitely not anti-business. My

starting point is that the fundamental purpose of business is to provide
goods and services to society while making a profit for those that take the
risk to invest in the efforts of the company. This cannot and should not
change.

At the same time it is clear that companies can find opportunities to

channel business expertise and energy into activities that contribute to
economic growth and profitability and address the social and
environmental challenges we face. It is all about finding the appropriate
balance.

So, how should business respond? How can it find this balance? In my
view there are four key steps to achieving this balance.

• First, a company needs to develop a framework for understanding the

issues and exploring the limits of corporate responsibility.

• Second, it needs to look for direction and guidance from within to

ensure that any actions are consistent with corporate values and
business strategy.

• Third, it needs to actively seek external views and perspectives to

ensure that the company understands public concerns.

• Finally, each organisation must develop managers and leaders with the
capacity to adopt a sustainable approach to business.

In the short time I have available this afternoon I am only able to speak
about the first and last of these approaches.

So, let me turn to the first issue – defining a framework. It is vital to have
a clear understanding of what we mean by the term corporate
responsibility. It is an infinitely elastic concept – the more companies do
in this area the more society demands of them. One of the first steps a

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company must undertake is to clearly define what it can and cannot do in

the field of sustainable development.

In my opinion, it is useful to think of corporate responsibility at three

different levels. The first, normative level could be described as what
society expects of companies and enforces through rules and regulations
and through social pressure.

The second level, the instrumental, is corporate activity that can deliver
enhanced profitability and serve wider social and environmental
objectives. I will give you some specific examples of such activities in a
moment.

The third level is systemic and relates to corporate activities that address
the fundamental social and environmental challenges I was speaking
about earlier. How a company can achieve this and at the same time
make a profit is sometimes more difficult to reconcile – but it can be
done.

Having laid out these three levels of corporate responsibility and given a
brief indication what each of them means, I think it important to stress
that they are not discrete elements. Rather, they are all facets of a new
approach to doing business. This is what I have tried to capture in this
diagram – the three levels are inter-related and each serves to reinforce
the other.

So, having set out the model, let me now offer a brief example of what I
mean by each of the three levels.

At the normative level, business is subject to the rules and regulations set
by the laws of the countries in which it operates. Business is also subject
to a wide range of informal restraints that stem from societal disquiet
about corporate behaviour. In addition, companies are seeking to set
standards through voluntary initiatives such at the United Nations Global
Compact agreement.

At this level business is already taking action in a number of different

ways. Companies are saving money and protecting the environment
through pollution prevention, waste reduction and the development of
eco-efficient business processes.

Businesses are also seeking to support charitable causes through a range

of different community investment programmes. For example, in China
the oil company BP has been running its Environmental Education
Initiative for almost ten years. The programme aims to raise awareness of
environmental issues by working with teachers in the education system.

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In collaboration with the Chinese Ministry of Education, the aim is to

reach nearly 200 million students in China.

So at this normative level we can see that much is already being done by
business to give something back to the society in which it operates – by
respecting the environment and working with the local community.

However, business can do more by seeking to address social and

environmental issues in a more fundamental way at the instrumental level
– by developing win-win partnerships with other actors in society. Let me
give you two brief examples of action at this level.

In the UK, the retail company TESCO is faced with a key business issue of
gaining planning permission to build new superstores. There is a strong
anti-corporate sentiment among the public and real resistance from the
planning authorities to the development of new shopping centres
especially in the affluent areas of south east England.

To address this challenge, TESCO has begun working with local

community groups in less affluent areas where they would not
traditionally consider building a new superstore. They call this initiative
regeneration partnerships. It involves opening stores in some of Britain's
most deprived urban areas.

Over the past six years the company has created a total of 12
regeneration partnerships, creating 3,000 jobs and contributing to
economic regeneration. Most importantly from a business perspective,
these 12 stores are proving to be some of the most profitable in the
company’s portfolio of operations.

Another quick example of instrumental activity is provided by IBM. They

are seeking to enable greater access to the Internet. Despite its early
promise of becoming a global community, most of the content on the
World Wide Web is still primarily in English. For many Spanish speaking
people living in the USA, this means that the Internet is beyond their
reach because of language barriers.

To help close this Digital Divide, IBM has launched a new programme with
Latino community groups called Translate Now. IBM researchers are
working with Hispanics throughout the United States to refine and perfect
translation software that will enable them to translate English content into
Spanish accurately on the Web. This new simultaneous translation
software is answering a real social need and providing IBM with a
business solution that is developing into a new product.

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So again, here are practical examples of how companies are responding

to social and environmental issues and developing new business
opportunities. However, it is still important to recognise that this type of
instrumental activity is occurring within the traditional business model.

Moving to the third level of activity – the systemic – requires a shift in

thinking that challenges the conventional notions of business activity. Let
me illustrate this point by one specific example – that of the multinational
company Unilever which has over 400 brands in the food, heath and
personal care sectors.

Hindustan Lever is Unilever’s business in India. Historically, the company

generated around half its business from India’s towns and cities and half
from rural areas, where its products are sold in larger villages with
populations of 2,000 or more.

Five years ago the company realised that to increase its market share it
had to expand the market. The challenge was to reach the half million
villages with smaller populations in more remote parts of the country,
where there are millions of potential consumers but no retail distribution
network, no advertising coverage and poor roads and transport.

Hindustan Lever’s solution was to tap into the growing number of

women’s self-help groups that had been springing up around the country.
Hindustan Lever made presentations at rural self-help group meetings
and invited women to become direct-to-consumer sales distributors. The
company provides training in selling, commercial knowledge and
bookkeeping, teaching the women to become fully-fledged micro
entrepreneurs.

Each woman who becomes a distributor invests 10,000-15,000 rupees

(US$220-330) in stock at the outset – usually borrowing from self-help
groups or micro-finance banks facilitated by Hindustan Lever. Each aims
to have around 500 customers, mainly drawn from her own village and
nearby small villages. Most generate sales of 10,000-12,000 rupees a
month, netting a monthly profit of 700-1,000 rupees (US$15-22). For
those with husbands who work in the fields, this typically doubles the
household income.

This new business model has proved to be a great success for Hindustan
Lever and for women in India. The project started in a few pilot villages in
Andhra Pradesh in 2000. By the end of 2004 it had grown to over 13,000
women entrepreneurs covering 50,000 villages in 12 states, selling to 70
million consumers.

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For the company this represents a 30% increase in sales in rural areas is
of course of significant business benefit. It has been achieved with strong
support from over 300 partners, including NGOs, banks and government
departments, who recognise the potential for economic growth by
encouraging women to become entrepreneurs.

So once again this is a real example of a business operating at the

systemic level to address the problem of rural poverty in a way that
speaks to the core strengths of the company’s strategic goals and makes
sense for the organisation.

I hope that you agree that these examples are models that other
companies should seek to learn from. If we do agree that is necessary for
business to develop solutions to the complex challenges facing society
today, the question then becomes – how do we develop managers and
leaders to respond to this new challenge?

This is the final issue I want to turn to now by drawing on the results of
recent research undertaken among more than 30 senior executives from
11 leading multinational companies.

In their view, encouraging people to develop a responsible approach to

business leadership requires the development of a new set of
management competencies. In trying to define the management
competencies associated with corporate responsibility, they found it useful
to consider the following three characteristics of management behaviour:

• Leadership qualities which are in the domain of personal attitudes and

beliefs

• Management skills that are taught and developed such as stakeholder

dialogue and building partnerships

• Reflexive abilities which can be described as the key competencies

required to integrate social and environmental considerations into core
business decision making.

Our analysis of these key competencies is predicated on the notion that

corporate responsibility and sustainable development is a voluntary
activity over and above the legal requirements of business.

According to this view, corporate responsibility is a concept that applies to

all the decision-making processes and systems in a business. Hence,
developing a competency framework must involve the decisions, actions
and behaviours of all people – at all levels throughout an organisation
from senior management to the shop floor; across all functions; and in

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companies in all sectors. The end point should be a CSR competency

framework that is applicable to specialist and non-specialist alike.

However, in order to understand how CSR competences might be applied

in a specific organisation, one must consider both the organisational
culture and the nature of the business environment in which it operates.

Organisational culture relates to the strategy and vision of the company,

its business goals and its willingness to embrace notions of broader
corporate social and environmental responsibilities. It will also concern
the degree of transparency within a company and its ability to involve all
workers in the management change process necessary to embrace CSR.

Business environment relates to such factors as prevailing economic

conditions, the stage of business development (start-up or mature) the
complexity of business relations etc.

Let me turn now to the key findings of the research. An analysis of the
data generated by the interviews suggests that are five distinctive but
inter-related reflexive abilities. These are:

• Systemic thinking
• Embracing diversity and managing risk
• Balancing global and local perspectives
• Meaningful dialogue and developing a new language
• Emotional awareness.

Rather than speak about all five of these areas let me just highlight three:
systemic thinking, stakeholder dialogue and emotional awareness.

Looking to the first reflexive ability of systemic thinking, it is clear that if

you talk to any senior manager in a large company today and they will tell
you that the biggest challenge they face is managing complexity.

Companies recognise they are actors in large, complex systems and need
to interact in a web of relations with different stakeholder groups.
Business success and corporate reputation now depend on a company’s
ability to balance competing demands and engage people in collective
goals.

Dealing with this level of complexity requires the ability of systemic

thinking. At its simplest, it is the capacity to understand the
interdependency of systems across the business and between the
business and society.

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It is important to draw a distinction between systemic thinking and an

appreciation of complexity that is required in traditional management
disciplines such as finance or engineering. Traditional management often
calls for a form of analytical thinking that seeks to understand complex
situations by breaking them down into their constituent parts and
analysing the impact of individual components on the problem being
addressed.

In contrast, encouraging an appreciation of social and environmental

complexity (which is at the heart of systemic thinking) is simply not
amenable to this type of analysis. It requires a move beyond the
consideration of individual components and demands an analysis of the
interrelations across the whole system, understanding how things interact
with one another at the broadest possible level.

Understanding this dynamic is a vital element of integrating corporate

responsibility into business behaviour.

Stakeholder Dialogue

The second area I wanted to mention is the reflexive ability to maintain

meaningful dialogue with others by listening, inquiring and responding
appropriately. A senior executive in one of the companies we interviewed
provided a specific example of how this approach has changed the
decision making process within his company.

He described it as moving from taking action where one “decides,

announces the outcome and defends the decision” to a process of
“dialogue, deciding and implementing”. This simple description is a
powerful short-hand portrayal of a much more comprehensive method of
stakeholder engagement undertaken by his organisation.

I have heard others describe this as the capacity to hold productive

conversations – seeking out and valuing the views of others before you
make a decision.

The value in developing new forms of meaningful dialogue is that they can
offer the opportunity to explore assumptions, ideas and beliefs that
inform individual and organisational behaviours and actions. In this way,
companies and their stakeholders can begin to explore how differences
between groups can cause clashes which damage corporate reputation.

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Emotional Awareness

The final area I wanted to mention was that of emotional awareness –

which could be described as empathy or perception. At its simplest, this is
the ability to understand the broader implications of one’s decisions and
actions on others.

This capacity to identify the inter-relationship between emotions,

thoughts and behaviour was seen by many as a vital skill to operating
successfully in today’s business environment. I think we have all seen
incidents where reactions to business decisions are not based on rational
analysis but on feelings and perceptions.

Despite this, when going through the decision making process managers
most often describe their "thoughts" on business issues in entirely rational
terms – ignoring the fact that their viewpoint is not only the product of
conscious intellect but is also coloured by their feelings, emotions,
intentions and desires.

Hence, it is important that managers have the ability and willingness to

recognise that business decisions are not always driven by a process of
economic rationality or the “business case”.

I want to stop there in describing the reflexive abilities and move on to

the final issue I wanted to cover – what are the implications for
management development. The companies involved in the research are
already taking steps to develop the reflexive abilities they identified.
Some of the key lessons to draw from their experience are as follows.

First, it is clear that management development for corporate responsibility

needs to address fundamental questions of how an individual views the
world – how he or she ascribes value to certain types of management and
corporate behaviour.

Developing a person’s knowledge and skills will inform their world view
and values to a certain extent. However, the reflexive abilities identified
through this research describe the more fundamental features of an
individual’s character and personality. Giving people the opportunity to
question, explore and make meaning of the values and assumptions that
inform their decision-making process requires a carefully structured
process of analysis and reflection – something that is not necessarily
compatible with much of the traditional content of management
development programmes. There is a need to explore and experiment
with new approaches.

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Second, several of the companies involved in the research help managers

to develop a broader vision of the purpose of the business by taking a real
issue that has been discussed by the senior management team and
testing out responses and reactions in discussions with the next tier of
managers. Usually this involves designing exercises based on real
investment decisions to enable people to practice applying principles of
corporate responsibility and explore for themselves how business value
can be generated. In this way, they are encouraged to think outside their
direct area of responsibility, take a long-term perspective and develop a
broader understanding of the issues facing the organisation.

Third, the experience of businesses involved in the research suggests that

this process cannot necessarily be done in the traditional classroom
environment. There is a strong need for greater use of experiential
learning techniques – exposing people directly to different situations and
giving them the opportunity to reflect and experiment with potential ways
of dealing with the experience.

Fourth, and closely related to this point, is that that in developing relevant
programmes, companies are entering into partnerships with external
experts on social and environmental issues by working with NGOs and
pressure groups. Such organisations are felt to bring valuable skills and
knowledge that informs both the design and delivery of initiatives
addressing issues of sustainable development and corporate
responsibility. The external perspective of a potentially critical third party
is seen as an important ‘reality check’ and avoids an inward looking, self
referential perspective.

The final issue identified by businesses in the research was a challenge

that is currently the subject of great debate in the academic community –
to what extent should corporate responsibility be integrated into existing
business disciplines, rather than being taught as a separate subject.
Perhaps not surprisingly there was no real consensus around this issue.

Some interviewees were adamant that traditional management disciplines

needed to extend their scope to include issues of corporate responsibility.
Others argued that the issues are, by their very nature, multidisciplinary
and so require treatment and consideration in their own right. In short,
companies were arguing for the need to build both individual functional
expertise and multidisciplinary abilities.

Let me conclude by summarising my arguments and making a few closing

observations.

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I believe that there are business opportunities to be gained by tackling

some of the world’s most pressing social and environmental challenges.
To do so effectively requires the development of new management
mindsets, behaviours and actions.

Implicit in what many companies were saying about the way they develop
their people was the notion that they are seeking to bring about change
at three levels:

• creating a greater awareness of the issues relevant to the changing

role of business in society

• developing an ability in managers to undertake a critical analysis of

potential corporate responses

• and instilling the courage to take actions that are consistent with the
values of the organisation and appropriate to the situation recognising
the wider responsibilities of business.

While this presents new challenges for business, the prize is worth the
effort. The companies we have been discussing this afternoon have shown
how to deliver increased profitability and benefit society and the
environment.

Managers within these companies are being encouraged to critically

analyse the potential future. They are addressing real world issues and
developing the capacity to innovate, stretch and challenge conventional
wisdom on how to deliver business success in a way that respects the
society and environment in which they operate.

In short, these companies are beginning to rise to the challenge of

developing responsible leaders for tomorrow’s business. I hope that in
this brief presentation of their activities you will have learned something
useful from their experience. Thank you.

First presented at Symposium of the Korean Business Institute for

Sustainable Development, Seoul, September 2006

Ashridge Business School http://www.ashridge.org.uk