1

The Contested and Dynamic Field of Corporate Citizenshipin Emerging Markets   

Professor Sanjeev Khagram

The Kennedy School of Government

Harvard University

2

What is Corporate Citizenship? (CC)

Governance Arrangements that Foster Firm’s “rights and responsibilities” practices

Can take the form of:

State Deregulation and Voluntary Corporate Responsibility

State Regulation and Mandatory Corporate Compliance

State Ownership and

3

Rights and Responsibilitiesof the Firm

Discretionary

Social

Economic

Legal

4

Two Common Approaches ToCorporate Citizenship

Society The society model considers Corporate Citizenship primarily in terms of changing patterns of governance or relationships between key social actors. Though business or parts of companies play an important role as social actors, dynamics within firms or differences among firms are not an emphasis.

Firm Another dominant model of Corporate Citizenship considers the firm as the primary focus, including both the firms relationships with other stakeholders and intra-firm interactions and dynamics. But this approach tends to miss the (pro-)active role that firms play in shaping the societal context and changing patterns of governance.

5

A Society Emphasis

Social actor A - Firm

Social actor B – Govt.

Social actor C - NGO

Dynamic forms of

governancefor society

6

A Firm Emphasis

Firm  intra-firm dynamics 

Primary Stakeholders

Secondary Stakeholders

Institutions/Society/

Natural Environment

7

The ‘Field’ Approach Integrates these Two Approaches

Firm

Society

‘Field’ Industry

Combining the Society and Firm perspectives on Corporate Citizenship into one approach is possible in terms of the ‘field’

framework. Hence Corporate Citizenship is defined as the rights and responsibilities of firms within the dynamic and contested field

of governance relationships among social actors.

8

A Multi-Level Framework for CC Is Requiredand the Industry/Sector Becomes a Central Focus

Social Level

Industry Level

Firm Level

Due to the Interaction &

Interdependency that exists a multi-

level analysis is required.

9

Thus, Through the ‘Field’ Approach, A Comprehensive Framework is Employed

State Regulation

Self-Regulation 

State Ownership

State Regulation 

Self-RegulationState Ownership

State Regulation

Self-RegulationState Ownership

Firm

Industry

Society

Employees

 

Firm Management

Other Firms

Shareholders

Government

NGOsCommunity

10

Stakeholder Expectations of and Effects on Firm

Stakeholder Expectations Effects

Government/IGOs Accountability Regulatory Framework

Employees Good Working Conditions Productivity

Local Communities Socio-Econ Development License to Operate

NGOs Transparency/Equity Reputation

Industry Minimum standards Guidelines/Best Practices

Consumers Quality Products/Services Demand/Purchasing

Investors Acceptable Risk/Return Capital

Natural Environment Clean Processes/Products Limits/Opportunities

11

Corporate Citizenship Trends in Brazil

Changing Dynamics in Brazilian CC

•Dynamic Roles of Private, Public and Third Sectors

•Democratic and Strategic Model More Widespread

•Innovations Appropriate to Context – Flexibility and Creativity

Common Drivers & Characteristics of Brazilian CC

•Catholic religious ethics and morals

•Great disparity in wealth – “increased risks”

•Democratization, Privatization, Globalization

•CC associations and groups – Instituto Ethos, IBASE, etc.

•Cross-sector partnerships

•Social Balance Sheets

12

Brazilian Industry Context: The Banking Sector as a Leader in Corporate Citizenship Effort

Banking was one of the First Industry Sectors to Broaden Corporate Citizenship due to

• Foreign capital requirements

• The industry’s influence on the daily lives of Brazilians with issues such as high interest rates, inflation and currency fluctuations

• The banking industry has close ties to the public sector/government

• Industry support groups exist, such as ABAMEC, founded in 1971.

As of 2001, Febraban reported that 175 banks operated in Brazil, making Sao Paulo the financial center of Latin America

“ABAMEC – Sao Paulo was founded focusing on the information transparency, on the professionalism and the ethical standards [of the Financial Services Industry & Financial Market

of Brazil]”- ABAMEC Institutional Profile

13

Brazilian Industry & Firm Context: Differentiated by 3 Ownership Structures

Shareholder Family Owned State Owned

Corporate Citizenship is Aligned

with Business Strategy

Corporate Citizenship

Reflects Founding Families’

Priorities & Reputation

Corporate Citizenship as

a means of Improving Social and Economic Indicators

Common Motivations by Ownership Structure:

14

Brazilian Industry & Firm Context: MNCs

Similar motivations by ownership structure exist, but within these categories by ownership - multiple manifestations of Corporate

Citizenship.

Shareholder

Corporate Citizenship is Aligned

with Business Strategy

Examples:

•Sponsor Education for Disadvantaged Youth in Target Markets

•Micro-Credit

•Environmental/Social Risk Assessment

•Academic Loans

•Forest Stewardship Council (FSC)

15

Brazilian Industry & Firm Context: Family Ownership

Similar motivations by ownership structure exist, but within these categories by ownership - multiple manifestations of Corporate

Citizenship.

Family Owned

Corporate Citizenship

Reflects Founding Families’

Priorities & Reputation

Examples:

•Schools & Training Centers

•Expanding Services Offered to Non-Banking Brazilians

•Cultural Contributions

•Community Level Environmental Improvements

16

Brazilian Industry & Firm Context: State Owned Banks

Similar motivations by ownership structure exist, but within these categories by ownership - multiple manifestations of Corporate

Citizenship.

State Owned

Corporate Citizenship as

a means of Increasing

Public Goods and

Improving National

Indicators

Examples:

•Regulation of Business by Region & Industry

•Increased Level of Education of Workers & their Family Members

•Offer programs that provide Financial Education to Non-Banking Brazilians

17

Drivers and Characteristics of Corporate Citizenship in South Africa

- Can be characterised as an intricate and transnational network of groups and initiatives evolving around a set of principles and expectations, and are thus themselves closely related to emerging forms of new governance. These networks are strengthened by international initiatives, such as the Global Reporting Initiative, which is aiming to use South Africa as a pilot study for its guidelines in emerging economies

- Companies with significant overseas stock ownership place greatest emphasis in terms of official CC policies and publicized efforts to implement these policies. In addition to the rigorous risk management and corporate governance requirements of the largest foreign stock exchanges, a key factor is the increased emphasis on CC by large institutional investors in Europe and the USA, particularly. This emphasis has been heightened by the launch of sustainability indices, such as the FTSE4Good and the requirement that UK pension fund trustees publish the social and environmental criteria of their investment

- South African stakeholders and developments, such as the recently published and well-respected ‘King 2’ Report on Corporate Governance (King Committee on Corporate Governance, 2002), the development of a FTSE/JSE Social Responsibility Index for the main South African stock exchange (FTSE/JSE, 2002)- FTSE4Good but adapted to South African circumstances. The index selection criteria are based on three principles: environmental sustainability, positive stakeholder relationships, and upholding and supporting human rights (FTSE/JSE, 2002). In each of these areas, companies will be asked to demonstrate improvement over their own performance, “relatively good performance in comparison to appropriate peer groups”, and “performance which meets the expectations of society more generally” - and mandatory investments by the state pensions fund in socially responsible investment (SRI) also are critical drivers for CC within the country.

- Having become increasingly confrontational in their critique of the state’s economic policies/programme, the trade unions,

led by the Congress of South African Trade Unions (COSATU), also argue that South Africa’s focus is now more about class than about race. This race-class debate has significant implications for the relationship between CC and the government imperative of black economic empowerment (BEE), or the process by which control and benefits of the formal economy should come to represent the racial character of the country. In particular, the Black Economic Empowerment Commission explicitly provided a “broader definition of BEE,” which would include “job creation, rural development, […] land ownership, […and] access to finance”

18

South African Corporate Citizenship – The Business Case 

·         Efficiency and cost savings: The initial argument for companies to embrace sustainable development was ‘eco-efficiency’, by which production is innovated in such a way that material and energy inputs are decreased per unit of output. Some have argued that “environmental issues are bottom line sensitive, but the bottom line implications of social issues are not clear” In South Africa, there are signs that new factories are implementing cleaner technologies, for both eco-efficiency and regulatory reasons. ·        

Reputation assurance and brand management: For many companies, a good reputation is an important ‘intangible asset’. A good reputation with government is important in order to win government contracts or obtain operating licences (for new mines, for instance). A good reputation amongst peers and business associations is conducive to building business partnerships and lowering transaction costs, while a good reputation amongst NGOs and community groups is an important element of risk management. Perhaps most importantly, a good brand image amongst investors, banks, and insurers increases access to capital and insurance. A positive reputation also contributes to attracting and motivating high-calibre employees.  ·         Risk management: Particularly in sectors such as mining, where there are significant direct impacts on neighbouring communities, CSR and good community relations is meant to minimise this risk of community or labour protest, which could cause operational disruptions and reputation damage. Another aspect of risk management that is especially significant in South Africa relates to HIV/AIDS. Many companies have calculated that a proactive programme on preventing new infections and providing care to infected employees is beneficial in the medium to long term, notwithstanding the high costs of such a programme.  ·         Identification of new business opportunities that may arise from the proactive engagement with sustainable development challenges. One example that is discussed in greater detail below is the potential expansion of banks’ consumer market by means of developing innovative products for low-income earners.  

19

South African Industry Context: The Mining Sector as a Leader in Corporate Citizenship

- Mining companies have long been involved in what would now be considered CC-related initiatives. These were related particularly to philanthropic efforts and political lobbying to assuage the worst excesses of the apartheid regime, in response to fears of social upheaval in the African ‘townships,’ as well as the international sanctions campaign, which gained momentum in the 1980s.

-- In 1976, following the Soweto uprising, a number of corporations, led by Harry Oppenheimer of Anglo American and Anton Rupert of Rembrandt (an alcohol and tobacco company), set up the Urban Foundation, which would provide private sector support to critical urban development issues.

-- Foreign companies, in particular, experienced significant pressures to divest from South Africa. An alternative approach was established by means of the Sullivan principles, launched by Reverend Leon Sullivan in 1977 “to help persuade US companies with investments in South Africa to treat their African employees the same as they would their American counterparts

-- Significant changes in recent years, the current estimates are that between 67 and 70% of the South African mining industry is owned by foreign investors. The two most prominent companies to have ‘depatriated’ their primary listings are Anglo American plc and Billiton (now BHPBilliton), both list primarily in London.

20

Emerging Characteristics of Corporate Citizenshipin South African Mining Industry

- 57% of companies are producing sustainability reports – and now all those who want to list on Johannesburg stock exchange are required to do so

- companies such as Anglo American have published policies, principles, and social and environmental reports: Anglo American plc and its subsidiaries have an established tradition of community involvement and social investment. The move from philanthropy to corporate social investment indicates a more strategic approach to discretionary use of funds.

- an important element of a company’s commitment to CC is the manner in which it complies with government regulations. This is because the state is significantly constrained in enforcement of regulations. Corporate accountability is as important as corporate responsibility.

- negotiations of the ‘Sector Partnership Committee,’ which included government departments and established mining representatives (the Chamber of Mines), as well as emerging, black mining companies (organised in the South African Mining Development Association), foreign mining companies, and the National Union of Mineworkers produced the ‘Broad-Based Socio-Economic Empowerment Charter’ which allows for a ‘scorecard’ to judge individual companies’ which includes not only black equity ownership, but also employee share ownership schemes, human resource development, employment equity (aspiring to 40% black participation in management), preferential procurement, beneficiation, and local economic and social development in mining and labour-sending areas.

21

CC Emerging Good Practices in South African Mining Industry

- Even prior to the recent legislation, the mining sector saw a marked increase in the number of BEE deals, in which significant shares and operational control were vested in black owned companies. Examples include two 50:50 joint ventures between Anglo Platinum (the world’s largest platinum producer) and, in the one instance, African Rainbow Minerals and, in the other, the Bafokeng tribe.

- Special efforts have also been shown to institute effective ‘social plans’ to

minimise the negative social impacts of employee retrenchments, for instance in the case of Canadian company Placer Dome.

- Mining Firms were among the first to realize and stress the sustainability implications of the HIV aids crisis. Several leading companies are not only implementing comprehensive treatment programs (sometimes also for afflicted family members), but also proactive prevention programs including educating workers, families and communities.

- Mining Firms are among leaders in producing corporate sustainability or tripple-bottom line reports. Several companies have won awards for their reporting including BHPBilliton Palabora; Gold Fields, DeBeers, Impala Platinum, Iscor

22

Brazil and South Africa Illustrate a Multi-Level, Interdependent, Multi-Sector, Dynamic Corporate

Citizenship Context

State Regulation

Self-Regulation 

State Ownership

State Regulation 

Self-RegulationState Ownership

State Regulation

Self-RegulationState Ownership

Firm

Industry

Society

CC is moving from State Ownership/Regulation Towards Mixture of All

Three Governance Forms.

23

Industry/Sector Examples Demonstrate a Multi-Level, Interdependent, Multi-Sector, Dynamic Corporate

Citizenship Context

Employees

Firm Management

NGOs

Shareholders

Government

INGOsCommunity

Mixed-Regulation

Within the Mixed-Regulatory Context in Brazil and South Africa, there are an Increased Number of Partnerships and Inter-Dependencies among all Sectors

24

Currently Most Important CC Activitiesand Key Benefits to Companies in Emerging Markets

• Most Important CC Activities

- Environmental Process Improvements

- Human Resource Management

- Cross-Sector Partnerships

- Sustainability Reports

• Key Benefits to Firms

- Cost Savings

- Productivity Growth

- Access to Capital

- Access/Increased Demand in New Markets