Posted 11.2.05The number of interesting breakout sessions available to participants in the 2005 annual BSR conference in Washington, D.C., this month were too numerous to choose from easily. With two breakout sessions a day during the first two days of the conference and one on the last day, each packed with six to seven fascinating topic areas, people struggled to decide which session to attend. Three sessions regarding the corporation are covered here: “When the Multinational Corporation is Chinese,” “What is the Purpose of the Corporation?”and “Strategies for Identifying True Stakeholders”.
The number of interesting breakout sessions available to participants in the 2005 annual BSR conference in Washington, D.C., this month were too numerous to choose from easily. With two breakout sessions a day during the first two days of the conference and one on the last day, each packed with six to seven fascinating topic areas, people struggled to decide which session to attend.
Three sessions regarding the corporation are covered here: “When the Multinational Corporation is Chinese,” “What is the Purpose of the Corporation?”and “Strategies for Identifying True Stakeholders”.
When the Multinational Corporation is Chinese
With the help of a translator, Wang Jiming, president of China’s Business Council for Sustainable Development and vice chairman of Sinopec, spoke to a well attended break out session about the progress Sinopec (a/k/a China Petroleum & Chemical Corporation) is making toward socially responsible and sustainable business practices.
Sinopec Corp. is one of the largest integrated energy and chemical companies in China. The scope of its business covers oil and gas exploration, development, production and marketing; oil refining; production and sales of petrochemicals, chemical fibers, chemical fertilizers and other chemical products; storage and pipeline transportation of crude oil and natural gas; import, export and import/export agency business of crude oil, natural gas, refined oil products, petrochemicals, chemicals, and other commodities and technologies; research, development and application of technology and information. It is China’s largest producer and distributor of oil products and No.1 producer and supplier of major petrochemical products as well as the 2nd largest crude oil producer. Following international models, Sinopec Corp. has set up a standardized structure of corporate governance, with centralized decision-making, delegated authority in management, and business operations handled by specialized business units. It has more than 80 subsidiaries engaging in exploration and production, refining, chemicals, marketing, R&D and foreign trade. Most of the Company’s operational assets and principal market is situated in China’s eastern, southern and central areas.
According to Jiming, Sinopec has closed down many old chemical refining plants and developed a coal gasification program. Investing $14 billion Chinese Renminibi (RNB) in quality upgrading over a six year period, they have reached the point where 99% of their facilities have stopped selling leaded gas on the market. They have begun compliance with Euro II and a recent audit of the company showed that 59% of facilities had reduced pollutants by between 12% and 30%. Euro norms refer to the permissible emission levels from both petrol and Diesel vehicles, which have been implemented in Europe. Changes for having a Euro II compliant vehicle require that the carburetor be replaced by an MPFI system i.e. a Multi-point Fuel Injection System. There are two basic types of engines, spark ignition and compression ignition engines. In the former, fuel ignition is triggered by an electric spark from a spark plug, while in the latter, atomized liquid fuel is injected with the help of a fuel pump and a nozzle into a cylinder full of hot compressed air, which results in ignition taking place. Larger cylinders which need more fuel require more than one injector, thus resulting in a multi-point fuel injection system.
“We are always complying with safety first,” said Jiming. “We remove deficiency and hazards at very beginning of the process. From 2001-2004 we invested $4.3 billion RNB and this year we will invest $1.39 billion toward these efforts.”
Sinopec is also carrying out poverty relief in 47 backward counties at a cost of $14.7 million RNB, improving the infrastructure and building 246 schools. In earthquake and flood areas they have donated assistance and, according to Jiming, are now exploring how to efficiently harness resources. He believes the need for Chinese companies to have a better understanding of the environment has heightened CSR awareness and efforts among those companies.
Chen Ying, deputy director general of China Enterprise Confederation, agreed, citing Sinopec as an example of Chinese best practice. Sinopec started into its CSR initiatives three years ago, shortly after Kofi Annan launched the United Nations Global Compact. She sees multinational corporations as important for their ability to bring modern management to China.
“There is confusion about CSR in China at this stage,” said Ying. “This is most the important problem. Next year we will start a program to promote environmental protection. We hope Sinopec will give their experience to other companies.”
However, Chandran Nair, founder and CEO of the Global Institute for Tomorrow, was more critical of Western multinational corporations and of the use of the term “CSR”. Advocating that business stop using the term CSR, Nair explained he feels there is a moral agenda rather than a dialogue about what business is trying to change.
“Geopolitical tensions are coming,” said Nair, “because Asian CEO’s privately understand CSR and are sick and tired of being preached to by Western multinationals.”
Referring to Japan as a “cool society and a nice place to be” Nair said the country has been pressured into having to perform to Western standards. He sees Asian CEO’s as business professionals who believe in paying the national debt to get their countries to next level and questioned what Western business saw as the boundaries within which these Asian companies should operate.
“I would prefer to see less preaching from West in the face of such hypocrisies and failures of democracy,” Nair stated, vehemently. “I’m not saying we shouldn’t interact, but no more preaching. There is a high cost to the entrenched positions of NGO’s and politicians who preach. Ultimately they are naïve and have little right to talk to the Chinese about human rights.”
Nair sees consumption as an obsession in the U.S. while there not enough for everyone else in the world and would like to see a discussion on how to spread the accumulation of wealth. He thinks the U.S. is going to have to get used to having Chinese and Indian business people “in your face,” as he put it, but he is not yet optimistic about their success. Although the Chinese are working to lift 250 million people out of poverty, the education system needed to do this is not in place.
What is the Purpose of the Corporation?
A diverse panel of experts offered legal, business and civil society perspectives on the critical question of whether it was time to build a broad-based consensus on the concept of the corporation that reflects 21st century expectations and shifting societal norms. Larry Mitchell, director of the International Institute for Corporate Governance and Accountability at The George Washington University has written three books in this area, two of which were submitted for Pulitzer Prize nominations. Of the panelists he was the most vocal regarding the new role of the corporation today.
“Over the last 25 years the purpose of the corporation has changed or focused pointedly to maximize shareholder profit,” said Mitchell. “Shareholder valuism is nothing new. Early in the 20th centuries it was assumed corporations existed to profit shareholders, then this concept was subsumed under production of labor and services in the post-Depression 1930’s.”
Mitchell targets the 1980’s in the U.S. as creating a huge normative shift in the way the corporation is perceived. This shift correlated with the dramatic increase in corporate takeovers and the rise in the idea of shareholder valuism. This is also the period when economists began to take a particular interest in corporate governance, but the focus was on maximization of shareholder wealth and nothing else with lawyers, legal scholars and Wall Street fairly quickly adopting this philosophy as well. He believes we are currently dealing with a notion of corporate purpose that is relatively new, only about 10-15 years old, and is a direct response to this transformation of the corporation. The proof, says Mitchell, is in the experience of corporate America in 2001 and 2002, which lead to accounting scandals, laying off of employees, environmental pollution and many other issues that were not good for the public perception of the corporation’s CSR.
“It is a perfect externalizing machine when the corporation exists to maximize stockholder value,” said Mitchell. “If we went back to the simple production of goods and services it would be a tremendous transformation. You would have to focus on use, your customer and the people where the money is coming from. Your customer is the world. These are the people who will make judgments on you and to whom you will be externalizing.”
Mitchell thinks compensation should change, because when corporate officers and directors are compensated in stock options, there is a push to up stock options to benefit those corporate officers. Without this type of compensation, corporate officers might think about more long-term compensation and objectives. Incentives have to change; said Mitchell, and it would help to have laws change.
Nike, Inc., is a corporation whose historical perspective started in 1970’s with the goal of serving the athlete. Founded with $500 and a handshake, Nike set out to provide a product that would enhance athletic performance. This concept resonated with athletes and then with the average consumer. When the company went public it became increasingly global and increasingly scrutinized as it moved through the 1990’s toward its goal to become the largest sport and fitness company in world.
This was not motivating for employees, according to panelist Sarah Severn, director of Corporate Responsibility and Sustainable Development for Nike. By early 2000 Nike decided to go back to its roots and created a new mission statement to “bring inspiration and innovation to every athlete in the world,” adding “if you have a body you’re an athlete”.
“We have to deliver value to five constituents: employees, consumers, business partners, communities and shareholders,” said Severn. “All five have to be met to deliver value to shareholder communities.”
The question for Nike became “How do you integrate this into the core purpose of the company?” According to Severn, they realigned their whole CSR organization, recently reorganized and looked at how the business operates. They developed three clear goals: to effect positive systemic change in workers conditions in the footwear apparel industries; to relate to the heart of company by creating innovative sustainable products; and to effect social change in relation to sporting activities by promoting gender and racial equality and combating the nationally recognized problem of obesity in the U.S. by promoting exercise and healthy lifestyle choices..
“Now we are looking at systems of measurement,” said Severn. “How do we measure the financial and social value of including these pieces into the score card? Nike’s management no longer regards it as a closed system.”
Panelist Deborah Doane, chairwoman of The Corporate Responsibility Coalition (CORE), joined in pointing out that the unintended consequences of a corporation’s good intentions are not always good. Using McDonald’s, who is now one of biggest buyers of apples in the west, as an example Doane pointed out that McDonald’s can only buy two kinds of apples and the result hurts biodiversity as growers will now only plant those two varieties in order to participate in the profit. She asked the audience to consider what institutions we need to deliver a sustainable society; what is the corporation today and the purpose of the corporation, and how do we harness private capital for public good which is the original intention of the corporation?
“We’ve flipped it [the corporation] on its head,” she said. “Decisions are based on a narrow set of drivers. Ethical decisions are made only if there is a risk to the company or there are benefits to be made. Excessive executive pay has led to huge levels of inequality.”
Doane sees another problem in the fact that we’ve arrived at a point where the selection of finance is very aligned with the selection of things. Stock markets were once about raising capital for the production of things and they are now about keeping share prices up. CSR decisions, she says, are at risk of creating these same types of unintended outcomes. Poverty is a bigger challenge than putting vitamin A in rice as Monsanto has done to beat blindness in India when, in fact, the Indians have to eat thousands of bowls of rice to get a result. Although she sees positive signs suggesting that things are moving in the right direction, Doane questions whether the corporation can actually be retooled to a value based economy rather than a capitalist economy. In the U.K., where she is based, they are making positive strides and publicly traded companies now must report on their social and environmental campaigns. The House of Lords is looking at a bill to place a duty on stakeholders who do not do so.
“We have moved from companies for shareholders to the enlightened shareholder models,” said Doane. “The Holy Grail would be the pluralist model in which companies have multiple duties to a range of interests. Grameen Bank and the Cooperative Bank are good example. If we see the best, we still want companies to employ people, harness the best and harness private wealth for public good.”
The large looming question, moderator Allen White, vice president of Tellus Institute pointed out, is how is this going to happen. Mitchell said he thinks there’s been a lot of really good work done in CSR, but sees a significant change in capital gains tax that would create financial incentives for shareholders to be the answer.
“Change the incentives,” said Mitchell. “Mission statements won’t work. We have to force behavioral change and let them see the benefits of being free from market capital pressures to take a long-term view.”
Mitchell sees the question of what the purpose of human beings in the form of the corporation are as a fabulous question. Personification of corporations is so difficult because it is impossible to separate the decision maker from the decision. These decisions, he says, will have consequences that corporations will never experience, whereas most human beings have to experience the results of their decision making.
“When you define purpose as narrowly as law and finance does, you assume a role defined by the purpose of corporation,” he said. “If you operate the “corporate person” with that goal as the means to that end, you strip the corporation of any possibility of humanity.”
Severn sees the corporation as a collection of human beings and says it is up to them to voice their viewpoints about how the company is being managed. She sees it as far too easy for corporations to say they are a legal entity and can’t get out of particular agendas that can undermine the company. Doane sees an incredible amount of hypocrisy in business and especially in the CSR community with companies who are leaders in the CSR field often ending up as not out to co-solve the problems, but to get as much mileage out of the CSR banner as possible.
Strategies for Identifying True Stakeholders
The term “stakeholder” is a common buzz word and second nature for companies to use, but companies who wish to shape their approaches to CSR effectively need to understand who is a true stakeholder and who simply takes an interest in a company’s actions. Panelists from companies who have carefully analyzed their possible stakeholders and have developed a systematic approach to working with them shared their experiences in a well-attended session.
Stakeholder engagement at oil giant ConocoPhillips is seen as a tool to manage risks and leverage opportunities, according to Fernando D. Rodriguez, manager of Health, Safety and Environment (HSE) and Sustainable Development for the company. He believes stakeholder engagement is a dialogue at different levels that give his company an opportunity to do business in an environmental friendly, efficient way and to improve the way they do business.
“Stakeholder is the word on everyone’s lips,” said panelist Mike King, chief executive of The Environmental Council. “A lot of people think it is the central plank of CSR, but that is not true in the U.K.”
The audience laughed as he told them that, towards the end of 19th century “stakeholder” in Great Britain was the trusted middle person in prize boxing matches who held the money or the stakes until the fight was over. King believes definitions and dialogue are very important in stakeholder engagement. Consensus building was later called stakeholder dialogue, and since then, it has become a core part of business.
The Gap is a company that is looking at improvement of working conditions in their factories, according to Darryl Knudsen, global partnerships manager for the Gap. His company has 90 employees in countries around the world working on improving factory conditions.
“To our company stakeholder engagement is a way to find better and more sustainable solutions,” said Knudson. “But working with stakeholders takes more time. However, another benefit beyond more effective, credible and sustainable solutions is finding core issues and working with local groups.”
The Gap asks local human rights groups in the countries they work in to monitor factories, find the root causes of problems, and to engage stakeholders to facilitate dialogue and enhance the credibility of the Gap’s efforts. Knudson says they have evolved from reactive, skeptical and fearful to seeing the value of engaging with these groups to solve complex problems that face their industry.
With 320,000 employees around world, General Electric Company (GE) produces everything from energy, aircrafts, plastics, and trains, to the emulsifier in shampoo. According to Bob Corcoran, vice president of corporate citizenship and chief learning officer at GE, the company has done two things very well for a long time: Make money – a profitable business model is necessary for CSR – without ever feeling guilty about making money, and focus on compliance and integrity. They engage stakeholders through a simple process of communicating and listening. Most stakeholders have a single interest, while the company is responsible for a multifaceted view.
“Until five years ago stakeholder engagement at GE meant talking to our friends and people who agreed with us,” said Corcoran. “Now it is talking to people who disagree with our very existence and showing that business cares about more than the bottom line.”
Examples of good stakeholder engagement? Rodriguez told of an experience on the far side of Venezuela about eight hours from Caracas. The area was remote with sparse communities of indigenous people, often dealing with issues of malaria and other diseases. It was difficult for ConocoPhillips to communicate with these people, so they developed a webpage for information and people can write in with inquiries. Fifty countries a month inquire through the webpage, enriching the process and giving the company a way to consider issues of stakeholders. Rodriguez says stakeholder engagement provides the corporation with a human face.
Corcoran cites GE’s 2003 environmental group decision to begin to deal with greenhouse gas emissions. As the largest alternative energy manufacturer in the world, they are the largest producer of wind turbines, solar voltaic systems, aircraft engines that are the most fuel efficient on the planet, and the lowest emitters of gases. He says they saw themselves as having the most environmentally friendly locomotives and couldn’t understand why they were getting beaten up on environmental issues. So they decided to listen to some of their critics and, out of those discussions, the eco-imagination concept came up. First they began talking to people they knew as friends, then they engaged with critics such as Green Day and the Audubon Society. These groups were shocked GE would declare itself a green company.
“They told us ‘You are a big belching industrial company that lays ruin and waste’,” said Corcoran.
GE explained what they do and eventually Audubon wanted to help. GE then identified 50 more stakeholders and customers with whom to engage in further dialogue. All were shocked at being contacted by GE, but wanted to help the company become more sustainable and eco-friendly.
“Stakeholders told us what to avoid, what to do, and truly exhibited behavior we weren’t really expecting,” said Corcoran. “It was a very rewarding process.”
Rodriguez recommends going in early and creating a multi-level engagement on the local, national, and international level to include every level and spectrum of stakeholders. He advocates bringing as many new ideas to the table as possible.
“Companies need broader awareness and need to ask and answer tough questions,” said Corcoran. “Who are the cynics? Don’t tailor to them. They have no value. It is the skeptics you want. You want to convince them and work with them. They will make you think and in the process you make them think. The skeptics are willing to listen.”
By Janet Roberts
Weatherhead School of Management at Case Western Reserve University cultivates creativity, innovation, and purpose-driven leadership to design a better world.