I was relatively silent in today's class discussion on Corporate Social Responsibility despite the several thoughts that were going through my head as things progressed. The professor and several members of the class brought up many points – some which I agree with, and others I disagree with. In this note, I am hoping to put a structure around these thoughts, to clarify my own understanding. I will use instances from within and outside the Nestle case to address the finer points.
What is responsibility?
The most relevant of the four definitions at www.dictionary.com is "a particular burden of obligation upon one who is responsible." A further search of the word "responsible" results in several references to accountability. In the context of a corporation, the question then is about who the corporation accountable to, and what those obligations are. Upon giving some thought, I find that the components of the "pyramid" drawn by Prof. Kaul on the board form an adequate framework to explore the stakeholders and the obligations towards them.
The above classification is not perfect, nor are the various rows mutually exclusive of each other. However, these are the stakeholders that most readily enforce a corporation's performance on each dimension. The row on which I struggled the most was in determining the stakeholder that enforces ethical obligations. The most powerful I believe is the marketplace – a company which has engaged in unethical behavior, be it against its customers, competitors or collaborators, will be ultimately punished by the marketplace (which is constituted by these three parties).
The point that comes out of the above table is that while the first three obligations end up getting enforced on most corporations, the social component gets enforced only through the response of one of the other three stakeholders.
At this point, I have a couple of concerns with the direction the class discussion on this paradigm went.
Philanthropy is not an obligation. On the other hand, the "R" in CSR is an item of obligation. This was what was brought up by Adi Gupta (perhaps bluntly), and is a matter that merits considerable discussion. Most corporations substitute philanthropy for social responsibility. I will discuss this a little later.
What divides ethics and philanthropy is not a fine line – there is a clear distinction between the two. In very simple terms, ethical behavior is necessary to prevent harm (to those affected directly or indirectly by one's activities), whereas philanthropic behavior is directed to create welfare to those affected. The fine line involved here is between the questions of what one "ought to be doing" and "could be doing." Philanthropy is only one of the things an individual or corporation "could be doing" for general welfare.
What is a corporation's responsibility towards the society?
A corporation's responsibility to the society is to ensure that the sum total of its activities do not result in a net loss to the society's welfare. This objective can be pursued in the following ways:
Welfare creation: Perform activities that create welfare, in a way that may or may not be related to the organization's business
Impact mitigation: Offset the ill-effects of your business through other actions
Impact minimization: Minimize the ill-effects of your business on the society
Benefit maximization: Maximize benefit to society due to your business
For most corporations, this list represents an increasing order of difficulty. The topmost item on this list is "philanthropy". In my opinion, this should form only a small portion of a firm's social responsibility. However, most firms appear to use their philanthropic activities as a proxy for the other three. At General Electric, where I worked for four years, employees are encouraged to contribute (time or money) to a variety of activities, organized by Habitat for Humanity, The United Way, or Elfun. The company was generous in matching monetary contributions to any of several listed causes. And as the article by Bhattacharjee and Sen indicates, these go a long way in attracting, retaining and motivating the best talent. And yes, they provide sufficient freedom and flexibility to not make it feel like a top-down mandate. But is this really enough? I was disappointed that the discussion in the class could (for various reasons) not dig deeper into the other three questions I mentioned above.
Should CSR necessarily be altruistic?
Part of the discussion centered around the cynical view that firms undertake "CSR"-related activities for its ultimate economic benefit. I see no issue with a firm deriving benefits in any sphere due to its activities in any other sphere. The Body Shops profits from selling natural cosmetics, as well as from highlighting the fact that they don't beat down the self respect of women by advertising using supermodels. Dell is on a quest today to become the "greenest technology company" and has so far focused on minimizing the environmental impact of their operations – and are not demure about their efforts. IBM has taken a more direct route – they are hoping to profit by making their products "green". Similarly, Nestle is perfectly justified in launching an "Ethical Coffee" blend, to capture customers who will respond to the same. It is when we equate CSR with philanthropy that the issue of altruism creeps in. In my opinion, the two issues must not be confused, as they commonly are.
Partner's Blend and Nestle's Social Responsibility
I'd like to analyze Nestle's Partners Blend along the four lines listed above. The question of whether they should go with their own notion of fairness to coffee growers or follow FLO's guidelines is secondary, and will be briefly discussed later. Information about the case discussed in class is here.
Welfare Creation: In undertaking £500,000 worth of developmental activities in Ethiopia and El Salvador, Nestle has (conveniently) added points to its "Social Balance Sheet." That they advertise and benefit from this must not detract from the fact that the coffee growers have also benefited. At 300 tonnes per year (1 ton = 2200lb), this contribution amounts to 25p per pound of coffee. It must be noted that this is in fact larger than the $0.05/lb that FLO promises farmers.
Impact Mitigation: The "impact" under question is the fact that most coffee growers end up getting a substantially smaller portion of the proceeds of selling coffee than they are entitled to, mainly because of the large number of intermediaries involved in the trading chain. Nestle helped mitigate the coffee growers pain of having to depend on coffee alone by supporting SEM to improve their coffee quality and helping diversify their income streams. Note that increasing purchase price (as advocated by FLO) is only one of the ways to mitigate revenue under-realization from coffee beans.
Impact Minimization: By purchasing 20% of their coffee directly, Nestle is clearly trying to minimize the ill-effects of multiple intermediaries – by cutting out intermediaries. It is at this stage that it becomes relevant to ask about increasing this percentage. As the largest single seller (and buyer) of coffee in the world, this is a company that may have the financial muscle to survive through increased costs through increased prices, if need be. Nestle has the power to transform the entire coffee market, and they must consider making it their aim to do so. The question brought up by Sanjiv – "What then if all coffee becomes Fairtrade equivalent" – could simply be answered by saying that the purpose of several social organizations should be to make their own existence redundant!
Benefit Maximization: Making the goal of maximizing benefit to coffee growers is certainly a harder pill to swallow, because it cuts right into the company's goals to offer their products at the most competitive price in the market. That said, in most cases, companies may not be investing enough in plucking the low-hanging-fruit simply because those benefits do not accrue to them. For example, Nike could either set "minimum standards" (minimizing impact) or "target conditions" (maximizing benefits) for the working conditions at their manufacturing facilities in Asia. The cost of having one Nike employee oversee these facilities continuously is not very significant.
The Fairtrade Question
After reading part (B) of the case, I was relieved that both Nestle and FLO did the right thing. One of the most unfortunate outcomes of several social ventures is that countervailing opinions on "what is the better thing to do" slow down the delivery of any amount of "good" to the intended beneficiary, let alone the "better". To me, the debate between Nestle and FLO was, at least in part, about this. Ultimately, both organizations were able to agree that coffee growers would benefit from the launch of Partners Blend, and were able to lend credibility to each others' efforts. Since this step has been crossed, it remains to be seen how far Nestle slides along the spectrum of activities constituting social responsibility.
Summary
Corporate Social Resposibility is much more than philanthropy. It is the obligation of the corporation to ensure that the sum total of its activities do not result in a net loss to the society. Evaluating the net impact of a corporation's activities on the greater society is certainly very challenging, and a difficult metric to reach consensus on. Stakeholders who are least vocal and whose interests are furthest from the economic value created by the firm, are the ones most likely to be impacted negatively. The responsibility of a firm lies in identifying the negative impacts of its activities, and either offsetting or minimizing these effects. Philanthropic activities must not be used as a proxy to fulfill a firm's social responsibility.
