Corporate Citizenship: The Leadership Challenge from the Changing Global Context

1. Corporate Citizenship:The Leadership Challenge from the Changing Global Context Sandra Waddock Boston College Politeia, Milan, Italy, May 2008

2. Lee Scott committed Wal-Mart, world’s largest retailer, to a future focused on sustainability, eco-friendly products, more affordable health care, and excellence in supply chain management on ESG Bill Gates, CEO Microsoft, called for a “creative capitalism” to make self-interest serve the wider interest The conservative Economist admitted that CR is here to stay, despite that too few companies do it well Klaus Schwab, executive chair of the World Economic Forum, argued for a “new imperative” for businesses he called “global corporate citizenship,” including stakeholder engagement and participation as stakeholders with governments and civil society Consider… in January 2008…

3. We live in an insecure and fractured world • Fractures • Globally, 1 in 5 people live on less than $1 a day. • 2.8 billion people on the planet live on less than $2 a day. • 1.1 billion people have no access to clean water. • 2.4 billion people lack adequate sanitation facilities. • Life expectancy in developed nations (1999) is 75 years; in developing countries it is 49

4. We face growing schisms • Boundary-less, unrooted corporations with global reach and scope • Relatively less powerful governments • No global governance mechanisms focused on ESG • Grave concerns about corporate ecological practices, responsibilities to stakeholders and societies

5. Brave new world… Historically, no individual, tribe, or even nation could alter the global climate, destroy thousands of species, or shift the chemical balance of the atmosphere. Yet this is exactly what is happening today, as our individual actions are mediated and magnified through the growing network of global institutions. That network determines what technologies are developed and how they are applied. It shapes political agendas as national governments respond to the priorities of global business, international trade, and economic development. It is reshaping social realities as it divides the world between those who benefit from the new global economy and those who do not. And it is propagating a global culture of instant communication, individualism, and material acquisition that threatens traditional family, religious, and social structures. In short, the emergence of global institutions represents a dramatic shift in the conditions for life on this planet. • Senge, Sharma, Jaworski & Flowers (2004)

6. Scientific consensus on man’s impact on climate change • Intergovernmental Panel on Climate Change (UN): • Global atmospheric concentrations of carbon dioxide, methane and nitrous oxide have increased markedly as a result of human activities since 1750 and now far exceed pre-industrial values determined from ice cores spanning many thousands of years… . The global increases in carbon dioxide concentration are due primarily to fossil fuel use and land use change, while those of methane and nitrous oxide are primarily due to agriculture (IPCC, 2007, p. 2).

7. The earth can’t sustaincurrent levels of consumption • It already takes 1.2 planets to support current levels of human consumption of food and materials, inherently not sustainable • Every ecological system is in decline • The Living Planet Index—a measure of the health of the world’s forests, freshwater, ocean and forest ecosystems--declined by 37% from 1970 to 2000. • Although population growth rates have slowed, population is expected to peak at about 9 billion by the middle of the 21st century (from 6.5 b today)

8. Tomorrow’s companies face a world that is… • Relationally based • Allowing for leadership everywhere • Sharing power • Collaborating • As much as competing • Globally aware • Socially and ecologically knowledgeable and sensitive • Creative • Flexible and adaptive • With values-based principles • And have the will to lead

9. Questions about companies’ performance and role in society… • Explosion of interest in corporate responsibility (CR/CSR), since mid-1990s • Growing responsibility infrastructure that • Supports companies in their CR efforts • Pressures companies for more • Criticizes and critiques corporate actions

10. Pushing corporations to behave more responsibly and sustainably Using mechanisms based in market, civil society (and peer pressure), and, increasingly, state. Developing for half a century, but exploded in the mid-1990s (along with, perhaps not coincidentally, the internet) A Growing infrastructureon corporate responsibility

11. State-government Mandate—new laws and regulations Sources of Institutional Pressures for Corporate Responsibility • Market-business • Internal management approaches • Responsibility assurance infrastructure • Business and other associations • Socially responsible investment • Civil society/societal • Multi-stakeholder dialogues and initiatives • Journals and magazines • Ratings and rankings • Academic initiatives • Watchdogs and activists

12. Meant to hold companies more accountable, push them in the direction of greater responsibility …within the current structure and system. But…all this begs the question of what the purpose of the corporation is and should be for this new millennium Increasingly clear that the old model is too limited Notions of maximizing shareholder wealth as the sole purpose of the firm increasingly called into question Ultimately questions: purpose of the firm Infrastructure

13. A new social contract? • The old social contract between business and society is shifting and uncertain • Current emphasis--maximizing shareholder wealth • But new transparency/visibility of corporate actions • E.g., Naomi Klein, John Perkins • Demands new leadership skills • Back to the future: do we need a new definition of business in society? • In light of climate change and the deteriorating natural environment • To cope with problems social equity, security, and long-term sustainability • To refocus the firm on serving society’s long-term interests

14. Companies are already responding by… • Managing their responsibilities explicitly (e.g., supply chain management, environment/sustainability, stakeholder engagement) • CR-TRM) • Developing a wide array of strategic CSR initiatives (partnerships, social entrepreneurship, philanthropy, community relations, and • Issuing ESG/multiple bottom line reports

15. Significant advances in the ‘social movement WBCSC: 180 world’s largest companies’ CEOs UNGC: 3000+ company members Majority of big firms now issue some form of sustainability or triple bottom line report Companies tout ESG performance on websites And so on… All this activity has triggered a reaction E.g., Economist articles Robert Reich’s new book Supercapitalism and his critiques Truly, the ‘usual suspects’ are the main actors…penetration isn’t as deep as we might like BUT…movement has generated talk of corporate redesign and reform Corporate ResponsibilityCorporate Social Responsibility

16. Investors: Social investment SIF 2005 trend report: SRI total assets $2.29 trillion/$24.4 total assets or about 9.4 % of total assts invested in SRI Assets in screened mutual funds: $179.0 billion Shareholder resolutions reaching a vote rose to 50% in 2005 Social funds experiencing substantial growth in number and diversity of products Mainstream money managers are increasingly incorporating ESG factors into their investment decisions Natural Environment WBSCD’s 180 members ISO environmental standards Impact of An Inconvenient Truth Global scientific consensus on climate change/global warming Corporate sustainability and environmental reporting (or triple bottom line reporting) Evidence of Impacts of CR

17. Alignment Matters Between stakeholders and managers about risks and responsibilities facing the company) Mind the Gap Stakeholders frame issues broadly, while manages tend to frame them narrowly Moving Targets, Sharper Aim Dynamic environments seem to most conducive to developing stakeholder-manager understanding Corporate Social Innovation High alignment companies view social and ecological challenges as drivers of innovation and responsibility And… A New Landscape for Leaders…RESPONSE Report Key FindingsEuropean Commission and EABIS (2008)

18. From the Inside-Out Integration of sustainability principles into operating practices and processes and strategies is key to CR Reinventing Stakeholder Engagement Stakeholder engagement is important but not sufficient, most effective when real give and take Developing Responsible Managers Experimental data indicate that managers who use meditation and relaxation techniques are better able to integrate responsibility into day-to-day decisions and actions (than those who get traditional executive education) RESPONSE 2008

19. EFMD Globally Responsible Leadership Program highlights four key challenges Future leaders of corporate citizens will need to: • Think and act in a global context • Broaden their corporate purpose to reflect accountability to society around the globe • Put ethics at the center of their thoughts, words, and deeds • Business education needs to be transformed to give corporate global responsibility centrality

20. Employees (human and labor rights): SAI 8000 standards Raised up standards of acceptable practice Fair Labor Association Communities: Activism on big box, anti-corporate Anti-corruption Success of Transparency International Ethical Trading Ethical Trading Initiative Fair trade movement Civil markets… Customers Surveys claim purchasing decisions increasingly made on CSR/CR criteria… But customers are the missing link Citizens Markets, a new entity focused on consumer education Changes for other stakeholders

21. CR works squarely within the existing system Has numerous accomplishments: Fundamentally accepts the dominant definition of the firm and asks that while pursuing ‘maximum’ profits firms be more responsible Attempts to create more external pressures and systems for accountability Pressures companies to pay attention to ESG issues for reputational and network reasons CR has also raised the visibility of issues like Human rights and business Peace and security Participation of business in abusive/violent regimes Ecological sustainability and business’ role in fostering it Societal issues (e.g., HIV/AIDS in Africa, education in US and elsewhere) BUT…CR can’t do it all

22. Can or should corporations be redesigned to meet 21st century needs? What should the new social contract between business and society that Kofi Annan called for in 1999 actually be? Will corporate responsibility…in the current system and structure get us there? The future of the planetis in our hands

23. Re-thinking the corporation • Some people now argue that what is needed is a system redesign, a ‘re-purposing’ of the firm to include environmental, social, and governance issues • And better meet the needs and demands of the 21st century

24. Rethinking has already begun…Some now question the system • US legal scholar Kent Greenfield (2005) argues for five new principles • The ultimate purpose of corporations should be to serve the interests of society as a whole. • Corporations are distinctively able to contribute to the society good by creating financial prosperity. • Corporate law should further principles one and two. • A corporation’s wealth should be shared fairly among those who contribute to its creation. • Participatory, democratic corporate governance is the best way to ensure the sustainable creation and equitable distribution of corporate wealth.

25. UK’s Tomorrow’s Company • Vision • [The] vision is to create a future for business which makes equal sense to staff, shareholders and society. • Founded in 1995 with an inquiry into the role of business in a changing world, introduced introduce the concept of an inclusive approach to business success in which a company: • defines and communicates its purpose and value • develops a unique success model • places a positive value on each of its relationships • works in partnership with stakeholders • maintains a healthy reputation.

26. Questions on corporate purpose… • US Legal scholar Lynn Stout (2007) concludes about Dodge v. Ford (the sole US court case backing up ‘maximization of shareholder wealth)’: • Corporations seek profits for shareholders, but they seek other things as well, including specific investment, stakeholder benefits, and their own continued existence. Teaching Dodge v. Ford an anything but an example of judicial mistake obstructs understanding of this reality (Stout, 2007, p. 12)

27. Corporation 2020 Principlesfor Corporate Redesignwww.corporation2020.org • The purpose of the corporation is to harness private interests to serve the public interest. • Corporations shall accrue fair returns for shareholders, but not at the expense of the legitimate interests of other stakeholders.  • Corporations shall operate sustainably, meeting the needs of the present generation without compromising the ability of future generations to meet their needs.  • Corporations shall distribute their wealth equitably among those who contribute to its creation.  • Corporations shall be governed in a manner that is participatory, transparent, ethical, and accountable. • Corporations shall not infringe on the right of natural persons to govern themselves, nor infringe on other universal human rights.

28. What should be the nature and purpose of the corporation? Who really owns the corporation? Charles Handy notes that shareholders are not owners in any real sense How owners take their rightful place in the firm? How can companies’ social contracts be re-written to better serve long-term social needs…while maintaining the benefits of capitalism? Speed, innovation, creativity, flexibility Is growth at all costs a wise long-term strategy for the planet? How can corporations foster true ecological (and social) sustainability? What do we really need…productivity or jobs? How do we balance the interests of rich and poor nations and people? Some questionswe need to ask now…

29. So… • Many are already raising fundamental questions about the nature and purpose of the firm in society • What if…corporations had multiple objective functions after all and had to take into consideration factors like… • Producing solid and fair returns for shareholders • Providing decent work and decent work security for employees at local living wage standards • Producing socially beneficial products and services • Meeting stringent ecological standards • Localizing and regionalizing production, distribution, and selling wherever possible

30. Leadership needs the usual… • Adaptability, flexibility, creativity, risk-taking…and more… • To cope with stakeholder- and sustainability-driven, transparent, accountable, and publicly-purposed corporation of the future

31. Ability to understand, cross, and cope effectively with multiple functions in the enterprise Capacity to manage across multiple sectors with a wide variety of stakeholders Collaborative (not just competitive) approaches to dealing with cross-functional and cross-sectors boundaries, demanding New types of listening and learning New ways of understanding Ability to contextualize information, knowledge, action Some future leadership capabilities

32. Understanding of very different stakeholder perspectives—and capacity to act effectively on those understandings Ability to act with integrity, systems understanding in a transparent world Ability to define success without exponential growth Capacity to deal with ambiguity and tension inherent in a multiple objectives (multiple bottom line) world Courage, capacity, creativity to be a change agent internally and externally More leadership capabilities for the future…

33. WHY?Peter Senge quotes Micko Nishimuzo, World Bank VP, saying: The future appears alien to us. It differs from the past most notably in that the Earth itself is the relevant unit with which to frame and measure that future. Discriminating issues that shape the future are all fundamentally global. We belong to one inescapable network of mutuality: mutuality of ecosystems; mutuality of free movement of information, ideas, people, capital, goods, and services; and mutuality of peace and security. We are tied, indeed, in a single fabric of destiny on planet earth. Policies and actions that attempt to tear a nation [corporation] from this cloth will inevitably fail.