Business Ethics and Corporate Social Responsibility - Essay Example

? Business Ethics and Corporate Social Responsibility The concept of Business Ethics The purpose of a modern public corporation is thought to be the maximising of its shareholders’ wealth. Other goals such as serving customers, building great products or providing good jobs are seen as being legitimate business ends only if they increase “shareholder value” (Stout, 2012) . Top business schools teach that maximizing profits and shareholders wealth is the primary measure of managerial competence. Corporate compensation policies including pay-for-performance schemes and stock options have also tended to perpetuate this narrow definition. It is therefore no surprise that generations of corporate managers have grown up believing that business ethics consists merely of complying with civil and criminal law and not doing anything that would damage the reputation of the company or its products (Feiser, 2007). Goran Svensson and Greg Wood in their publication “A Model of Business Ethics” suggested that there is the need to define a new model of business ethics that needs to encompass not just the internal stakeholders but also the external stakeholders. This includes the society at large. They suggested that the society has expectations of each company, it has perceptions and it evaluates each company against those expectations and perceptions. They also pointed that these standards will be continually reviewed and modified and corporate managers have to measure up to these changes (Svensson & Wood, 2008). The trend for companies to measure up to society’s standards of ethics has been further enhanced by the emergence of large institutional investors as significant players in the capital markets from the early 1970s. These large investors have sparked the trend to what is termed Socially Responsible Investment where these large funds would only invest in companies that set “acceptable” standards of business ethics. The initial movements in this direction were by church related or religious charities that would not invest in companies making alcohol or cigarettes. When the large pension funds started to operate in the financial markets, they set their own norms by excluding from their portfolio companies that were accused of using child labour or unsafe work practices or of exploiting third world countries (Sparkes & Cowton, 2004). This trend has strengthened after the 2008 global financial crisis with investors seeking much higher standards of corporate behaviour than had been acceptable in the past. Ethical corporate behaviour is now enforced by the power of the media scrutiny that can force change. A good recent example is Starbucks in the UK being forced to pay additional tax after social boycott of their outlets following media reports of their tax avoidance practices (Hurley, 2012). The access to the internet and the social media by employees, suppliers and other stakeholders of large corporations also makes sure that ethical business practices are not merely professed but also practiced. In recent times, most public corporations have adopted the practice of publicizing their business ethics and corporate social responsibility projects voluntarily to build up the image of their companies in the media and amongst the investor communities. Various organizations have come up to rank companies on their business ethics and these awards are eagerly sought after. 2. The application of business ethics practices at Anglo-American and Primark 2.1 Anglo – American Anglo American is one of the world’s largest mining companies with revenues of ? 22 billion and profits of ? 8 billion (Anglo-American, 2012). Though it has mining operations all around the world, in countries such as Canada, Australia Brazil and Chile, 76% of its employees live and work on the African continent. The mining industry has some major challenges with respect to business ethics and sustainable development. A 2010 survey of stakeholders conducted by the International Council on Mining & Metals listed some of these issues. Topping the list is the environmental impact of mining. Mineral resources are often found in forest areas and the mining operation involves cutting down of forests in the mining area and for access roads, employee housing and other such activities. Mining leases cover thousands of acres of land and requires resettlement of large communities of people. Mining also uses up water resources and there is a major problem in handling and safe disposal or mining wastes. In several developing countries mining concessions are won by bribing government officials both at the policy making levels as well as at the local monitoring and implementation levels (ICMM, 2010). Let us now examine whether these issues are addressed in Anglo American’s report on the company’s business ethics and corporate social responsibility. The report accepts upfront that mining operations can have a big impact on the environment and on the societies. Mining companies acquire mining rights from sovereign states in return for investments to develop the mines and taxes and royalties. In addition they need a “social licence” from the communities where the mines are located. The company says that it has developed a tool called the Socio-Economic Assessment Toolbox that helps the company managers to measure the impact of their activities on the company and the community. The report talks of the several years of negotiation time with each householder that was needed to achieve resettlement of 98% of the people of one village in South Africa. The company reports having sold 26% of its assets through a government mandated black power empowerment programme to communities previously excluded from economic activity. The company also reports that it was instrumental in creating Exxaro, the largest black owned and managed mining company listed on the Johannesburg stock exchange. It also aims to hire 40% of its managers from previously disadvantaged ethnic groups. Anglo American also reports staring schools and health clinics, AIDS/ HIV monitoring at the work place, free retroviral drugs and other welfare measures. The above report from Anglo American does not present a very positive picture of the company’s efforts at business ethics or corporate social responsibility. The village resettlement process and the running of clinics and schools is common practice in the mining industry. The transfer of assets is a South African government mandated requirement and not an Anglo American company initiative. In the past year, Anglo American’s mining operations in South Africa have been plagued by wildcat strikes, inter union violence and low productivity. While these problems have been industry-wide, if the company’s social contract with the community was effective, Anglo American should have fared better than others. The high dependence on Africa for Anglo-American operations now threatens the parent company’s credit rating (Ibrahim, 2012). The company’s largest investor, the state owned Public Investment Corporation has said publicly that they believe poor capital allocation, bad project management and poor operational management have contributed to Anglo American’s poor performance relative to its peers. These also resulted in the sacking of the CEO Cynthia Carroll (Thomas & England, 2012). 2.2 Primark Primark is a ? 2. 7 billion clothing retailer headquartered in Dublin with stores at 256 locations spread throughout Europe. It is a subsidiary of the Associated British Foods group and is a major retailer of low-end clothing. Primark uses the name Penney’s for its stores in the UK and Ireland. The global clothing industry has some major challenges in business ethics. People around the world spent about $1 trillion in 2000 buying clothes. Over 93% of the 26.5 million total employment in the industry is in low skill garment making and that is located in the poorer countries of the world. As wage levels in countries like China and India rise, the industry shifts to lower income nations like Bangladesh and Vietnam in Asia and to places like Venezuela and Honduras in South America. Garment making is done at millions of small subcontract locations. The environmental concerns about the industry include the extremely poor working conditions in garment making units including long hours, poor hygiene including fabric dust laden air and low wages. Frequently child labour is employed by the subcontractors. Other concerns pertain to the use of toxic chemicals in the laundering, dyeing and finishing of the garments and the excessive use of potable water in these operations (Allwood, 2006). Primark has been the target of several media exposes on their garment sourcing practices in recent years. The most tragic accident was a fire at a Bangladesh garment factory in March 2010 that killed 21 people. This was only months after Primark is reported to have carried out an audit at the factory including one for fire safety (Hickman, 2010). Earlier, in 2009 a Primark supplier in the UK was found to be using illegal immigrants and paying them half the prevailing minimum wages (McDougal, 2009). To be fair to Primark, the factories where these problems occurred were suppliers to other companies as well. In the light of these issues with the global garments industry, let us examine Primark’s report on their business ethics programme. Primark says that as an international brand with a global supply chain, they have the responsibility to act ethically. Primark is committed to providing the best value for its customers but not at the expense of the people who make the products. This means making sure that Primark’s goods are manufactured under good conditions and the employees in those factories are treated well. Primark has adopted the ILO Code of Conduct for labour which includes employment being freely chosen with the right to collective bargaining, safe and hygienic working conditions with no harsh or inhumane treatment such as physical punishment, payment of living wages and prohibition of use of child labour. Compliance is ensured through audits and follow-up visits. Primark also reports working with a Non-Governmental Organization (NGO) in Bangladesh working on women’s rights and health. The above report card does not show Primark doing anything different from other clothing companies. The audit of factory conditions that Primark lists is also done by third parties located in the country of audit and is also subject to subversion by the factory owner who needs to protect his business interests. Working with an NGO may help prevent blatant maltreatment but cannot ensure that the working conditions are upgraded and maintained at minimum acceptable standards. In the case of another Bangladesh garment factory fire in November 2012 ( not linked to Primark) , 112 people died due to “blocked stairwells and locked emergency exits”. The company that owned the plant had been repeatedly cited for infractions of worker protection rules (Keeping & Zaman, 2012). 3. The costs and benefits of ethical behaviour There is now enough evidence to show that customers and consumers expect large corporations to behave ethically and this behaviour is not a cost to the company but a benefit. The Institute of Business Ethics in the UK study of FTSE-250 companies in the period 1997-2000 showed that companies with an ethical code in place produced greater economic value and market value than their peers. In 2003, 79% of the fund managers and analysts said that companies with systems in place for management of environmental and social risks had better value potential (Surdyk, J. 2004) The scandals around large corporations like Enron and Tyco leading to the arrest and jailing of high profile corporate executives caused a slew of legislation around the world to ensure transparency in corporate behaviour. In the early 21st century, that requirement now includes disclosure on the impacts on environment and society of corporate behaviour. The benefits of ethical behaviour will include inspired employees, meeting and exceeding the legal requirements such as the UK Companies Act of 2006, anticipating new legislation that could come in on climate change and most importantly managing the company image (Davis, 2011). Many companies have already adopted a proactive approach to raising standards of ethical behaviour and gained benefits from it. Marks & Spencer’s Plan A initiative on its environmental and social policies has improved its brand image, Diageo the alcohol company has earned respect with its programme to bring clean drinking water to one million people in Africa, Nike’s plans to bring sport to young women in Muslim countries and so on ( Davis, 2011). The management consulting firm KPMG conducts an annual survey of the quality of corporate responsibility reporting by major global corporations. The survey finds that 95% of the 250 largest global corporations report on corporate responsibility and the quality and content of these reports have consistently improved since KPMG started these surveys in 1993. UK companies are rated as amongst the best in report content and quality. This is partly due to the modified corporate disclosure rules that have come into effect in the UK (KPMG, 2011). Simultaneous with positive surveys like the one by KPMG, other organizations such as Covalence of Switzerland publish lists of the least ethical companies and highlight even single instances of failure of compliance. These tend to create strong negative impressions on consumers and investors. There is no doubt that ethical behaviour by companies has now become the norm and is assuming as much importance as complying with the law. 4. Benefit of external stakeholder relationships for Anglo-American Goran Svensson and Greg Wood in their model for Business Ethics on external stakeholder relationships say that whilst stakeholders can be far removed from the company’s day to day operations, they can impact the reputation of the company. Not to include stakeholders in one’s thinking is an invitation for trouble in the future; to ignore them is a recipe for disaster (Svensson & Wood, 2008). For Anglo American, the two most important stakeholders are the governments which give them mining licenses and the communities where the mines are located. If we focus on South Africa, which gives Anglo American over three-quarters of its revenues, the importance of these two stakeholders is self-evident. Anglo American invited the ire of South African president Thabo Mbeki in 2004 who, in a signed news article criticized the company for profiteering during the apartheid years by exploiting cheap black labour and later shifting its corporate headquarters to London (Terreblanche, 2004). Anglo American’s CEO Cynthia Carroll made it her personal mission to mend relationships with the government and the ruling party. The new CEO when named would need to carry this forward (Thomas & England, 2012). The company has sought to build relationships with the community where it operates by setting a series of goals for sustainable development. These include working without fatal accidents, eliminating occupational diseases, increasing diversity at the workplace, benefits from mining to the local communities and increasing energy efficiency. Anglo American says that it seeks a competitive advantage over rival mining companies by demonstrating a more caring and sustainable approach. The recent series of wildcat strikes at Anglo American’s mines in South Africa underline the importance of continued efforts at maintaining and strengthening such external stakeholder relationships. Without the “social licence” from the communities the company would find it impossible to sustain its business. In building these relationships, the company needs to recognize as Svensson and Wood pointed out that the external stakeholders have expectations, perceptions and evaluations and the company needs to continuously recalibrate its business model to meet these. * * * * References: 1. Allwood, J.M., et al (2006). “Well Dressed ?”, University of Cambridge, 2006 (accessed on 2 Jan 2013 at www. fashioninganethicalindustry.org) 2. Anglo American 1, (2008). “Business ethics and corporate social responsibility”, The Times 100, 2008. (accessed on 1 Jan 2013 at www. thetimes100.co.uk) 3. 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