Paper No. 11 50295 Corporate strategy and Summer 2009 inadequate governance: Susan Ariel Aaronson The pitfalls of CSR Susan Aaronson is an Corporate social responsibility programs can boost a company's reputation, strengthen the license Associate Research to operate and help create market advantages, but there are risks that CSR can undermine good Professor and 2009­10 governance in less developed countries where business takes on roles beyond their core competencies. Policy Research Scholar at George Washington University. When the world's richest man speaks, people lis- philanthropy. They are a form of soft law; firms ten. In 2002, Bill Gates told the World Economic also use these initiatives to communicate with Forum, "We need a discussion about whether and assuage their critics. the rich world is giving back what it should to The trend to CSR reflects globalization as the developing world." One way companies have well as the retreat of the state. As growing num- attempted to "give back" is through global cor- ber of firms source and produce globally, many porate social responsibility (CSR) initiatives. of their stakeholders have insisted that global While it is welcome that so many executives are firms be held accountable for conduct that determined to act responsibly, reliance on some could undermine economic, social or environ- CSR strategies can undermine good governance mental progress. Moreover, in recent years, the in the developing world. I focus in particular on traditional dividing lines between business and corporate efforts to provide much needed ser- government have become fluid. Industrialized vices including roads, schools, healthcare and and developing countries alike have deregulated other public and quasi-public goods. or privatized traditional public functions such Global CSR practices can be defined as as the provision of water, education, and postal "business decision-making linked to ethical val- services. But in many developing countries, gov- ues, compliance with legal requirements, and ernments are unable or unwilling to ensure that respect for people, communities, and the envi- all of their citizens have access to such services. ronment around the world." Almost every mul- Government officials may lack the funds or the tinational and many smaller companies have ad- "know how" to provide these services in an ef- opted such voluntary CSR initiatives, which can fective and equitable manner. And citizens often include codes of conduct, auditing and moni- lack the education or ability to influence govern- toring strategies, social and eco labels, as well as ment and obtain consistent and affordable ac- Corporate strategy and inadequate governance: The pitfalls of CSR cess to the resources they need to thrive. In such Moreover, if citizens don't communicate to poli- countries, governance is inadequate. cymakers what they need, policymakers don't Good governance is easy to describe but learn how to respond to such feedback. Citizens hard for all governments to consistently achieve. don't learn how to influence government or the Good governance is fluid: officials must respond importance of such learning for effective gover- to rapidly changing social, economic, techno- nance. Government officials may not be able to logical and political developments. But good provide governance that responds to changing governance is not just about the supply side of market and political needs, because there is not laws, policies, and regulations. Governance also an effective feedback loop between the govern- includes "the mechanisms, processes and institu- ment and the governed. Thus, CSR strategies can tions, through which citizens and groups articu- create a moral hazard problem. late their interests, exercise their legal rights... Anglo-American's experience in South and mediate their differences." Thus, good gov- Africa provides a good example of this dilem- ernance requires buy-in and involvement from ma. The right to health is written in the South citizenry (the demand side.) But to get that buy- African constitution. But until recently, the in, policymakers and market actors must ensure government was not wiling or able to provide that citizens have access to information as well as all of its needy citizens with access to afford- the ability to influence and contest public policy. able medicines. The largest employer in South Therefore, governments must respect civil and Africa, Anglo American, decided to take a proac- political rights. tive role. First, it invested in NGO educational Firms often respond to conditions of inade- projects designed to promote safe sex. But in so quate governance with CSR strategies. But there doing, the firm strengthened the NGO sector, an are several reasons why these initiatives may not action which some policymakers found threat- be sustainable. First, CSR strategies are expen- ening. Anglo-American also provided retrovirals sive. Firms may abandon their voluntary initia- to its employees, but decided it could not afford tives when times are tough or when competitors to provide the same medicines to dependents, do not have similar strategies in place. Secondly, contractors, or the communities where it oper- firms that provide quasi public goods through ated. While this strategy was both generous and philanthropy or partnerships with NGOs or in the firm's strategic interest (it estimated ¼ foundations may lack the expertise or consistent of its employees were HIV positive), it was also interest in providing these services. Firms may widely perceived as inequitable. But the firm did be distracted from their core mission. Third, not only face escalating demands for assistance. corporations can be easily manipulated by activ- According to the consultancy Sustainability, "the ist stakeholder groups that may or may not rep- government pushed back, ostensibly because of resent the public. And finally, because CSR strat- the lack of consultation." The strategy put the egies are voluntary and relatively new, we know government on the defensive (which could be very little about which approaches are most ef- good) but did little to build governance capacity fective in particular circumstances (the UNDP, to respond to the needs of the people. OECD, UN Global Compact and individual History may provide some insights into an scholars are trying to develop these insights.) alternative approach where managers built gov- Moreover, although executives may design ernance capacity. During World War II, U.S. and CSR strategies "for the people," these policies are Canadian policymakers relied on business ex- not by the people. If private firms provide public pertise to gear up production to a wartime econ- goods citizens may learn to expect these goods omy. Executives from many companies provided from private firms rather than from government. skills and know-how; some even served as "dol- lar-a year men." These executives saw their in- NGOs in providing such capacity. Firms should vestment of time and expertise as meeting both also take every step to avoid corruption or favor- the public and business interest. They wanted to itism that could result from such involvement. help the Allies win the war; and they knew that The Extractive Industry Transparency by working with policymakers they could build Initiative (EITI) is an interesting example of such future business ties. a partnership; it has garnered significant support Business investment in capacity building from the Bank. The EITI provides a framework continued after the war. In 1947-1948, many for citizens, policymakers, and business execu- European economies were struggling. After a tives to act upon their shared interest in ensuring harsh winter, citizens in many European coun- that that the extraction of natural resources does tries were restive. U.S. and European policymak- not stimulate corruption. In corrupt environ- ers feared that Communist parties would be in- ments, markets are distorted and characterized creasingly attractive unless they could stimulate by inefficiency. Neither corporations nor citi- economic recovery. Secretary of State George zens have the information they need to influence Marshall proposed that the US fund capac- governmental decisions. And policymakers lack ity building overseas. U.S. executives shared the incentives to respond to their citizens. latest management techniques with European The EITI partnership sets up a feedback executives as well as policymakers. They under- loop between officials and their constituents. stood that by helping European competitors re- EITI participating governments are obligated cover, they could lose market share. But they also to publish what they earn from resource rents reasoned that renewed competition would keep and to require firms operating in the country U.S. managers "on their toes," U.S. companies to publish what they pay to extract resources. could again reap economies of scale and scope, EITI also obligates implementing governments and that a healthy European economy was in the to ensure that civil society is actively engaged in business and public interest. the process. Citizens can learn how to monitor Similarly, managers today can provide tech- and influence government actions. Meanwhile, nologies, assets and skills to improve governance policymakers may gain greater understanding in the developing world. Such capacity building is an op- portunistic investment in the Figure 1: The EITI Process and Governance Capacity Building: Immediate and Long-term Spillover country and its people, and designed to bolster the com- pany's ongoing operations in Citizens learn how to Government announced such nations. Firms will prob- demand good governance, intent to implement EITI policymakers learn how ably only make such invest- to respond to citizenry ments if they perceive that the benefits of investment will outweigh the costs. To be successful, capacity build- Citizens use reports to comment on Firms obligated to ing efforts must be designed government actions, find areas to publish what pay governments improve reporting and governance to extract resources to respond to legitimate pub- lic demands (such as the de- mand for health care). For Government publishes what it receives and disseminates information to stakeholder this reason, executives often monitoring groups established under EITI partner with other firms and of problems in government administration such Key Sources as different agency approaches to budgeting or Susan Ariel Aaronson and James Reeves. 2001. regulation. And citizens will learn if government Corporate Responsibility in the Global Village: provides good and complete data; if such records the Role of Public Policy. Washington, DC: are computerized and if they are tested for ac- NPA curacy Ever so gradually, the habits of good gov- Extractives Industry Transparency Initiative, ernance learned under EITI could spill over into http://eitransparency.org the polity as a whole. Jedrzej George Frynas. 2005. "The False Governments implement EITI, and thus, it Developmental Promise of Corporate Social is not a form of CSR. However, many firms may Responsibility: Evidence From Multinational The Business and Development see EITI as a key element of their CSR commit- Oil companies," International Affairs 81(3): Discussion Papers encourage debate ment and strategy. Moreover, the EITI is aimed 581­98 regarding the different forms of at improving governance and the ability of the Julien Levis, "Adoption of Corporate Social private sector action for development and the sharing of best practices. state to be responsive to its citizenry. It is not de- Responsibility Codes by Multinational The series is one initiative of the signed as a business strategy, although extractive Companies," Journal of Asian Economics 17(1) Business, Competitiveness and firms contribute to the successful implementa- Anne Roemer-Mahler, ed. 2006. "Drivers of Development Program of the World tion of EITI. Corporate Investment in Public Sector Bank Institute. Authors are committed to fostering sustainable and equitable Ultimately CSR strategies may not be the Capabilities," Oxford Policy Institute (June) development and effective multi- best way for firms to "give back." A better ap- David Vogel. 2005. The Market for Virtue: sectoral partnerships. proach may be to collaborate with citizens, other The Potential and Limits of Corporate Social firms, and policymakers in building the capac- Responsibility. Washington, DC: Brookings For information on the Business, Competitiveness and Development ity of government to provide resources citizens Institution Program, and additional copies of need. The World Bank can play a helpful role by this issue, please contact Djordjija providing incentives for firms to invest in build- Petkoski, Program Leader at ing the capacity of governments to govern effec- dpetkoski@worldbank.org or visit http://www.developmentand tively and responsively. business.org/. Series Editor: Michael Jarvis Design: James Quigley Disclaimer: The views published are those of the author and should not be attributed to the World Bank or any affiliated organizations. Nor do any of the conclusions represent official policy of the World Bank or of its Executive Directors and the countries they represent. This paper was printed on stock containing at least 40% post- consumer waste.