CSR and Sustainability – from Milton Friedman to Michael Porter and Beyond … János Takács Academician - IAQ Vice President - EOQ HNC

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CSR and Sustainability – from Milton Friedman to Michael Porter and beyond … János Takács Academician - IAQ Vice President - EOQ HNC

The Friedman Doctrine, a Shareholder Approach Milton Friedman in his book Capitalism and Freedom, published in 1962 claims that the one and only responsibility of business is to increase its profit. He calls CSR a “fundamentally subversive doctrine in a free society” and states that “There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." (Milton Friedman, "The Social Responsibility of Business is to Increase its Profits", The New York Times Magazine, September 13, 1970.) By saying this, Milton Friedman takes a purely shareholder approach to Corporate Social Responsibility, identifying the shareholders as the only group to which the company and its appointed officers are accountable and responsible. In the mentioned article he goes as far as to compare social responsibility with the socialist view of allocating scares resources to alternative purposes based on political mechanism rather than market mechanisms. I will not spend time on arguing against these views – although I can’t disagree more – primarily because we made tremendous progress in understanding the importance of corporate social responsibility and sustainability. Nevertheless the importance of profits, of value creation, cannot be questioned. In business only solid profits can ensure long term sustainability and corporate social responsibility. Corporate social responsibility and sustainability creates value for all stakeholders.

Responsible Profit If we accept the definition of profit as being a financial gain, the difference between the amount earned and the amount spent buying, operating or producing something, than I would define responsible profit as being the financial gain obtained by a company that operates in a responsible manner, in line with the expectations of all of its stakeholders. Companies reporting a responsible profit are supposed to offer reliable, innovative, high quality products

1 and services; earn their income under the conditions of a free and fair market competition; source their inputs from reliable partners in free competition and transparent selection process; be an equal opportunity employer and take good care of their workforce; operate environment friendly production facilities, obey the legal requirements of all jurisdictions in which they operate (not only in their home countries), entirely fulfill their fiscal obligations, reject all forms of corruption, bribery or nepotism, protect and help the natural and social environment they operate in. Furthermore, these companies should demand all these values to be embraced by their suppliers, customers, business partners and employees alike. In other words, they should take a responsible approach to the entire value chain, from sourcing through production and distribution to recycling their product at the end of their economic life. Otherwise they make profit on the expense of their partners and stakeholders, which is not ethical; it is irresponsible. If a company is misusing his negotiation power and imposes unacceptably low prices to its suppliers, is making profits at the expense of its suppliers. If it pays non-competitively low wages, it makes profit at the expense of its employees. Tax evasion, or even legal, but not ethical tax reductions make profit at the expense of taxpayers. Customers, environment, authorities, local communities could also be “victims” of bad corporate governance.

Porter and Kramer’s CSR Value Chain Michael Porter and Mark Kramer in their article “Creating Shared Value”, published in the January-February 2011 issue of Harvard Business Review calls for redefining the purpose of corporations as creating shared value and not just profit. Porter and Kramer define the concept of shared value “as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates.” Furthermore they introduce the concept of “CSR value chain” suggesting that value chain should be used to show how CSR impacts the company’s strategy. If I understand them correctly, the authors hint that Creating Shared Value (CSV) is superior to Corporate Social Responsibility (CSR) and should supersede CSR in guiding the companies’ investments in their communities. Their view is that CSR programs focus more on reputation and have limited connection to the business, while CSV forms integral part of the company’s profitability and competitive position. They identify a number of differences between CSR and CSV, in my view somewhat forced and artificial. To mention only one, supporters of CSV claim that CSR is about doing something separate from the business and

CSV is about integrating social and environmental impact into the business in order to drive value creation. The contemporary understanding of CSR is far more complex than CSV. Some critics say that creating shareholder value is what all well-functioning companies do by default therefore CSV is a vaguer and less visible form of CSR.

What is Corporate Social Responsibility? There are a number of definitions for corporate social responsibility. In my view the definition is less important, the content, the CSR activities and their integration into the company’s strategy is what makes the difference. In 2011 the European Commission published its Renewed EU Strategy 2011-2014 for Corporate Social responsibility. The Commission defines CSR as “the responsibility of enterprises for their impacts on society”. In order to fulfil their corporate social responsibility, companies should have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders. To maximize their shared value creation, companies are encouraged to adopt a long-term, strategic approach to CSR, and to explore the opportunities for developing innovative products, services and business models that contribute to societal wellbeing and lead to higher quality and more productive jobs. Based on this definition and description I conclude that contemporary CSR, if correctly understood and applied is at least equal to CSV if not superior to it. Small and medium-sized companies can have a more informal, intuitive and sometimes ad- hoc approach to CSR. For large companies that are seeking a more formal approach to CSR, guidance is provided by internationally recognized principles and guidelines, such as (i) the OECD Guidelines for Multinational Enterprises; (ii) the ten principles of the United Nations Global Compact; (iii) the ISO 26000 Guidance Standard on Social Responsibility; (iv) the ILO Tri-partite Declaration of Principles Concerning Multinational Enterprises and Social Policy; (v) the United Nations Guiding Principles on Business and Human Rights. I believe that among quality professionals one cannot ignore the CSR definition by ISO 26000, which is a voluntary guidance standard for all types of organizations. The standard defines CSR as the responsibility of an organization for the impacts of its decision and activities on society and the environment, through transparency and ethical behavior that, (i) 3 contribute to sustainable development, (ii) takes into account the expectation of stakeholders, (iii) is in compliance with applicable law and consistent with international norms of behavior, and (iv) is integrated throughout the organization and practices in its relationship. The ISO 26000 standard defines seven key principles of CSR: (i) accountability; (ii) transparency; (iii) ethical behavior; (iv) respect for all stakeholders’ interest; (v) respect for the rule of law; (vi) respect for international norms of behavior; (vii) respect for human rights. The seven core subjects that ISO 26000 recommends to every user to consider are: (i) organizational governance; (ii) human rights; (iii) labor practices; (iv) environment; (v) fair operating practices; (vi) consumer issues; (vii) community involvement and development. A schematic overview of ISO 26000 offers us a better understanding of the complexity of Corporate Social Responsibility, its principles and core subjects and the relationship between CSR and sustainable development.

Corporate social responsibility is not a onetime exercise, is not a high jump. It is a process, a part of the long term strategy. CSR is not an optional add-on to the core activities of the business; it is about the way business is managed. It is not a marketing or communication tool to get publicity for the companies, but it does help the overall success of the business. Gifting and damage repair is not corporate social responsibility. CSR is a way of living, an organic 4 part of corporate strategy, creating a sustainable long term profitable business, safe, modern, sustainable jobs, driving innovation, R&D, offering care for environment and help and support for those in need. The ultimate objective of corporate social responsibility is to contribute to sustainable development, the development that meets the needs of the present without compromising the ability of future generations to meet their own needs. As such CSR correlates with the social and environment dimensions of sustainable development. CSR is a tool and way of doing business towards sustainable development. It helps attaining the 17 goals of sustainable development, illustrated in the picture bellow.

Role of the Stakeholders The development and progress of CSR should be led by the private companies themselves. They must be given the flexibility to implement CSR strategies that are most appropriate to their circumstances and quickly adapt to changing conditions in which they operate. Companies, particularly large multinationals should act in a responsible manner in all jurisdictions where they have operations, business activities. Most of these companies do, but there are cases where their CSR activities are limited to their home country and eventually to their largest markets. Subsidiaries at “periphery” are often neglected, or even limited or

5 prevented in their authority to act as responsible corporate citizens. These practices resemble to Milton Friedman’s shareholder approach to Corporate Social Responsibility, according to which only shareholders, owners of the business have the right to spend money – their money – for CSR purposes. The success of CSR is fundamentally determined by the commitment of the top officers – and/or the owners – of the company. However, in the long run, it is important that CSR becomes institutionalised within the organisation. And obviously CSR cannot be a vehicle for spending money uncontrolled. As part of the corporate strategy it is also part of the company’s budget. State institutions and state owned companies should also embrace CSR as core element of their strategy. They must show the same respect to human rights, apply best HR and employment practices, protect the environment, fight against all forms of corruption, bribery and nepotism. However, the way I see it, they must refrain from charity and philanthropy. Otherwise there is a risk – particularly in less developed democracies – that donations are serving political rather than social interests. Public authorities must provide the overall legislative framework, the basis for proper, fair competition, environmental standards, safety and equal opportunity at work and consumer protection. They should create transparency and predictability, market incentives for responsible business conduct and ensure corporate accountability, a political and business climate in which companies can operate efficiently and create shared value. As an example EU Directives require companies to include in their annual reports the “enhanced review” of operations, including non-fiscal matters, including CSR. Non-Governmental Organisations (NGOs) have the role to promote CSR, to facilitate the sharing of best practices and when and if necessary to signal problems and make constructive criticism, work together with companies to find the right solutions. Consumers nowadays are probably in the best position to influence the attitude of the companies by rewarding through consumption and price the responsible ones and punishing those that do little or nothing for the common good. Investors are also in a position to enhance market reward for socially responsible companies through investment decisions they take. The media – including social media – can raise awareness of both good and bad behavior of companies and as such has a huge power in influencing companies to adopt best CSR practices. It can act as watchdog to make sure that companies do not act illegally or irresponsibly. It also can give publicity to the CSR activities of companies. Giving publicity to 6

CSR is nothing bad; it helps spreading best practices and gives well deserved recognition to its practitioners.

CSR and Quality Management There are many ways to assess the connection between CSR and quality or quality management. One example is the European Foundation for Quality Management (EFQM) framework for CSR, an integrated approach that uses the Excellence Model as a common base. The model enables organizations to have an integrated approach to CSR. Corporate Social Responsibility is part of the EQFM fundamental concepts shown in the picture bellow.

Corporate Social Responsibility, just like Quality Management, is a philosophy of conduct, is a way of living, an organic part of corporate strategy, creating a sustainable long term profitable business, safe, modern, sustainable jobs, driving innovation, R&D, offering care for environment and help and support the sustainable development of the society. Walking through the core subjects, or main components of CSR, we can catch the strong relationship and interconnection with Quality Management. The success of CSR is fundamentally determined by the commitment of the top officers of the company, and so it is the success of Quality Management. Fair supplier relations, responsible sourcing is characteristic to socially responsible companies, and quality starts at the suppliers.

Responsible companies are equal opportunity employers, create safe stable working environment and sustainable jobs, pay competitive salaries and benefits, invest into human resource development, all this leading to superior employee satisfaction and loyalty. Well trained and well paid, experienced, loyal and satisfied employees produce high quality products and render high quality services. Improving business operation, optimising consumption of resources, reducing emissions and generally the environmental impact are supported both by CSR and quality management. Consumers appreciate high quality products and services at affordable, fair prices and reward companies both for their quality management and CSR efforts. Responsible, well-managed companies with an excellent quality management create shared value for all stakeholders. And last but not least, create responsible profits that enable them to reward all the stakeholders and help and support those in need. Quality management and Corporate Social Responsibility, stacked together, are making a positive everyday difference in people’s lives and for our planet.