INTERNATIONAL BUSINESS
MANAGEMENT (BUSI 1346)
Corporate Social Responsibility
Lecture 22, 18 March 2009Dr Michael Wynn-Williams [email protected]
1
THE ECONOMIC SYSTEM AND THE ENVIRONMENTAL EXTERNALITIES
Firms do not exist for themselves, they are part of human society
Does the earth have a finite carrying capacity?
Do current levels of economic activity exceed the carrying capacity?
How does the economic system respond to scarcities?
Is an externality a private good or a public good?
How should responsibility be allocated?
THE ISSUES AHEAD
Firms interact with the wider society and impact on the environment without necessarily taking full responsibility
Stakeholders are those that are impacted by a firm’s activities, but only a certain number receive compensation – employees, shareholders
Corporate Social Responsibility attempts to encourage firms to take responsibility for their impact
If firms are too selfish they may only bring short-term benefits – sustainability means taking the long-term overall effects into account
THE FIRM AS A SOCIETY MEMBER
TBL “fairness” targets People – employees and community Planet – sustainable environmental practices Profit – the economic benefit to the whole
community It is designed for public sector organisations,
but can also act as a guide for private companies
THE TRIPLE BOTTOM LINE
Source: Valley Green Building Task Force
David Crowther – the purpose of social accounting is to Measure and report on the impact a corporation has on its
environment Recognise the rights of stakeholders beyond the corporation
boundary
AccountAbility AA1000 offers a standard for including stakeholders in corporate strategy
Global Reporting Initiative (GRI) provides standardised sustainability reporting guidelines
United Nations Division for Sustainable Development Environmental Management Accounting (EMA) Guidelines for national governments looking to implement
their own principles (2001)
SOCIAL ACCOUNTING
A UN initiative to show that environmental, social and corporate governance (ESG) issues impact on investment decisions.
The principles provide a menu of voluntary options We will incorporate ESG issues into investment analysis and
decision-making processes. We will be active owners and incorporate ESG issues into our
ownership policies and practices. We will seek appropriate disclosure on ESG issues by the entities
in which we invest. We will promote acceptance and implementation of the Principles
within the investment industry. We will work together to enhance our effectiveness in
implementing the Principles. We will each report on our activities and progress towards
implementing the Principles.
The result should be enhanced financial rewards and align investment decisions with the aims of society at large.
PRINCIPLES FOR RESPONSIBLE INVESTMENT - PRI
International trade means that companies are increasingly in contact with unfamiliar labour laws
Companies have a choice between exploiting low local labour standards, or raising them to home standards
The International Labour Organisation (ILO) is the administrator for the International Labour Standards (ILS) A tripartite organisation – government, employers and employees Promotes opportunities for men and women to obtain decent and
productive work Promotes working conditions of freedom, equity, security and
dignity
ILO calls for a balance between flexible working practices and workers’ protection
Minimum wage agreements protect against deflationary wage spirals and social deprivation, but may inhibit job creation
Maintaining or raising working standards improves society in general and develops markets
PROTECTING THE EMPLOYEES
Developing nations are said to be at a disadvantage Lack of access to credit Lack of market power Dependence on perishable goods Inability to switch resources and factors of production
Farmers attempt to expand production to access economies of scale, but this leads to a cycle of falling prices and profits
The fair trade movement is made up of a number of organisations Fair Trade Labelling Organisations International (FLO) World Fair Trade Organisation (WFTO, formerly IFTA) Network of European Worldshops (NEWS) European Fair Trade Association (EFTA)
Their purpose is to Make direct connections between producers and buyers – no
middle-men Increase wages and profits to allow societies to invest in
themselves Set working conditions
FAIR TRADE
FINE
In theory, all trade entered into willingly must be fair Fair Trade organisations are themselves middlemen,
and require funds Fair Trade sets standards that can be difficult to
comply with, and even tougher when producers fail to comply
Adam Smith Institute criticises the market distortion Fair trade amounts to a subsidy When prices are low, subsidies discourage switching of resources Artificially raising prices with a price-floor means excess
production and even lower prices for non-fair trade producers According to defenders of fair trade
Prices start artificially low due to a lack of market power – the subsidy raises it to the rational market price
Fair trade does not affect the whole market, but may in fact segment the market with a new (premium) niche product
CRITICS OF FAIR TRADE
You are the overseas strategy director for Tesco, the supermarket chain
The company has recently expanded into Bangladesh You have offered the local workers an ethical
employment package Wages above the minimum wage Equal opportunities for men and women Training is available and there is opportunity for promotion
The employment contract is for hourly pay, meaning that there is job flexibility so that workers can arrange the job around their lives
However, Bangladesh is a country that is often beset by natural disasters, such as flooding. In such cases, many employees find it impossible to travel to work.
Your company policy, like in the UK, is that flexible employment terms mean that if people miss work they must make up the hours at another time or receive a reduction in their wages.
During a time of natural disaster, when it is impossible to work, this means that the difficulties are compounded by financial hardship. Is this fair?
CLASS TASK I – HOURLY WAGES
Not all efficient allocations are sustainable and not all sustainable allocations are efficient.
Market allocations may be either efficient or inefficient and either sustainable or unsustainable.
Policy changes that can produce win-win situations because by correcting an inefficiency, net benefits are increased.
CARE FOR THE ENVIRONMENT
A resource taxonomy is a classification system for resource availability.
Existing reserves Current reserves are resources that can be
extracted profitably at current prices. Potential reserves resources potentially
available. They depend on people’s willingness to pay and technology.
Resource endowment represents the natural occurrence of resources in the earth.
Taxonomy for Available Resources
Limited resourcesA depletable resource is not naturally
replenishedThe depletion rate is affected by demand,
which may change due to the price elasticity of demand
Allocation problems as the resource dwindles
A recyclable resource has some mass that can be recovered after use. Copper is an example of a depletable,
recyclable resourceRecycling may involve additional costs
A renewable resource is one that is naturally replenished. Examples are water, fish, forests and solar
energy.Requires flow management to prevent
structural damage
Taxonomy for Resource Limits
THE HYDROLOGIC CYCLE
Surface water is a renewable resource consisting of rivers, lakes and reservoirs.
Groundwater is water that collects underground in aquifers. Some aquifers are nonrenewable resources.
In many parts of the world, excess demand for water is causing great stress.
Groundwater levels have also been declining in many areas due to intensive pumping.
Water quality is also a growing problem.
Fundamental Resource: Water
Surface Water Opportunity cost of other uses Water is a highly variable resource
Ground Water Marginal user costs and benefits Depletable resource
Water Rights Riparian rights – land owner Prior appropriation doctrine – water
diverted to other uses Usufruct rights – right to use, not to
own
Water Allocation
Air is a public good Air is a mixture of elements at different
altitudes – air quality cannot be guaranteed However, air pollution has become a
significant externality Pollutants range from solids (particulates),
metals (eg. Lead), natural gases and industrial waste gases
Effects includeAcid rainRespiratory problemsClimate change
Filling the Air
Externalities can be paid for with caps and taxes Caps have predictable results, but unpredictable costs Taxes have predictable costs, but unpredictable results –
externalities are internalised so it is economically efficient but may not actually reduce emissions
The marginal abatement cost is different for different countries
In addition to caps, air can be commoditisd and CO2 can be traded Emission permits and credits are issued Surplus credits can be traded with organisations that
are in deficit Based on trading theory, there are gains from trade
available Developing nations can continue to build their heavy
industries by buying credits from developed nations – but this represents a tax on developing countries
Selling the Air
You are an activist with an environmental organisation
You have found that old oil wells can store CO2
How would you convince an oil company to spend money pumping CO2 into its empty oil wells?
How could this become a revenue generating activity for the firm?
Class Task
Elkington J (2001) Enter the Triple Bottom Line
<http://johnelkington.com/TBL-elkington-chapter.pdf> Principles for Responsible Investment
<http://www.unpri.org/>
Principles for Environmental Management Accounting <http://www.un.org/esa/sustdev/publications/proceduresandprinciples.pdf>
International Labour Organisation <http://www.ilo.org/global/lang--en/index.htm>
Nicholls A & Opal C – Fair Trade (Google Books) <http://books.google.co.uk/books?hl=en&lr=&id=Hmj6UlKhVDcC&oi=fnd&pg=PP10&dq=alex+nicholls+fair+trade&ots=5WbGN9Xkd1&sig=85eiXD_LeD3XfFsxZmp573_0j5A#v=onepage&q=&f=false>
Kit Kat chocolate goes Fair Trade – Telegraph article http://www.telegraph.co.uk/foodanddrink/foodanddrinknews/6730155/Nestles-Kit-Kat-goes-Fairtrade.html
Policy Options for Reducing Oil Consumption and Greenhouse-Gas Emissions from the U. S. Transportation Sector – Harvard University discussion paper <http://environment.harvard.edu/docs/faculty_pubs/lee_policy.pdf>
Useful Sources