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CSR and the credit crunch

Sean Carey talks to Daniel Litvin - author of <em>Empires of Profit: Commerce, Conquest and Social R

What exactly is corporate social responsibility (CSR)?

In essence, CSR is a voluntary effort by companies to behave ethically partly in the hope that this will boost profits. For example, it can involve a range of things including philanthropy; putting policies in place which respect employees; and behaving well towards customers and suppliers. These sorts of things, so the thinking goes, will help companies deliver good returns over the long run.

What are the origins of CSR?

As a term or phrase CSR is only about 20 years old. But as a concept it is several hundred years old. The first large companies of the modern era like the East India Company did many inexcusable and nasty things including waging war but they also often helped build schools, hospitals and other infrastructure in the parts of the world they invaded.

Bring us up to date -- which companies are keen on CSR these days?

Well, the days of invading territories are long gone. But, to give just a few examples, modern day British retailers like Marks & Spencer and Sainsbury’s claim to operate with an ethical dimensional by raising their environmental standards, for example. And companies like McDonald’s, which claim they are making their food healthier, are often doing so as part of a CSR programme.

Are there certain sectors which are keen to promote CSR more than others and, if so, why?

Traditionally it's been the companies that have historically been under pressure either from the public or from politicians that have taken these issues the most seriously. The giant oil and mining companies like Shell and Anglo American have been very keen on CSR for over a decade now.

Similarly, in clothing and footwear companies like Nike and Reebok have boosted their CSR efforts because of all the allegations, fair or not, about sweatshop labour from their overseas suppliers. Pharmaceutical companies like Glaxo SmithKline have also come under pressure to invest more in CSR because of issues like pricing of AIDS drugs in Africa.

So no one does it out of altruism or benevolence then?

Well, doing it out of benevolence and because there is a lot of public pressure are not entirely inconsistent, in my opinion. The latter can encourage the former in companies. It's not always like that, of course. For example, a lot of the smaller fair trade companies have been set up as social enterprises which are intended primarily to produce benevolent effects but which also, they hope, make money.

But overall is CSR more the province of larger rather than smaller firms?

Large firms tend to have bigger budgets to allocate to CSR departments. And, of course, it's no coincidence that firms like, say, Shell or McDonald’s have global brands to protect. But I would argue that even if they don't have a global brand it is very important for small companies to protect their reputation. It won't do them any good and it will tend to damage their business if they are seen to be exploitative of their employees, for example.

Former US labour secretary, Robert Reich, has argued that CSR is about window dressing -- put simply, improving the brand image of big corporations in order to pull the wool over the eyes of poorly informed consumers and regulators. Reich suggests that elements of CSR like environmental and working conditions are for governments to sort out and not the responsibility of individual corporations. Is he right?

Well, there are two points here. First, it is precisely because governments have often failed or found it difficult to regulate that the burden has rightly fallen on companies. Let's take climate change: at an international level governments have failed to put in place sufficiently tough regulations which would reduce CO2 emissions. This has meant that a number of companies have voluntarily tried to reduce their carbon footprint. In other words, these companies have begun to step tentatively into the gap left by the failure of governments.

Secondly, in developing countries there is sometimes simply an absence of government and so companies are really obliged to step in. I’ll give you an example from the oil sector in Africa and Asia: here companies are often operating in particular poor and undeveloped regions in countries like Indonesia and Nigeria. In these areas central governments may not be providing basic things like education, health care, transport or electricity and so companies step in and create facilities and infrastructure which, at least in theory, should benefit local people.

Of course, Reich makes his point from a centre-left position but a similar argument was proposed by the most famous free-market champion of recent years, the late Milton Friedman. He said that while companies should abide by government legislation their business was quite simply to maximise profits and that CSR was irrelevant.

Yes, one of Friedman's famous phrases was "the business of business is business" -- maximising shareholder value, in other words. But the obvious answer to that is the state of the global economy in the last year in which an excessively narrow focus on “the business of business” in the finance sector has almost brought the global economy to its knees. It's been both a failure of governments to regulate and the failure of businesses to understand their broader ethical responsibilities and focus too narrowly on short-term profits. So I think Reich and Friedman from their different political perspectives have both got it wrong.

As we enter what looks to be a very serious economic downturn in the global economy do you think that many companies will be tempted to jettison CSR in order to protect their financial bottom line?

Yes, there will be a temptation to downgrade CSR -- budgets will be under pressure. But there will be a risk in doing so. There has been a huge erosion in trust from both the public and politicians in companies which operate in the banking sector, for example. Banks have often been viewed somewhat sceptically but they are now being blamed for the collapse of the whole system. In many respects, the crisis is the outcome of the failure of ethics on the part of business and big banks, particularly in relation to their internal controls.

And I must point out that at least a few ethical investors in the US were raising questions about mortgage-backed securities a few years ago. Unfortunately, their voices were not loud enough and they were not heeded and the result has been that hundreds of billions of dollars of shareholder value have been wiped out in the last six months.

So to sum up: I think it would be a disaster if all the efforts to make big business ethical were discarded just because of the credit crunch - particularly since it was caused by an ethical failure in the first place.

Dr Sean Carey is Research Fellow at the Centre for Research on Nationalism, Ethnicity and Multiculturalism (CRONEM), Roehampton University he was talking to author Daniel Litvin who is Senior Research Fellow at Chatham House and founder of Critical Resource, a London-based consultancy specialising in social and environmental issues facing big corporations