4th OECD World Forum “Measuring Well-Being for Development and Policy Making”

1. 4th OECD World Forum“Measuring Well-Being for Development and Policy Making” Business Strategies and Corporate Social Responsibility Georges Blanc Professor Emeritus HEC Paris Resident professor FDC Brazil Delhi, October 2012 Session parallel 1c : Business, jobs and well-being

2. Sustainability as a new enterprise strategic driver The new objective of the firms is sustainability, in its different dimensions : • Economical (Profit) • Ecological (Planet) • Social (People) • Ethical This sustainability objective has direct strategic impacts in the company : • On the business models : transformation of old models and development of new models: low energy consumption, no pesticides fibers, microfinance…. • On the corporate strategies : building of specific stakeholders policies sharing value with clients , suppliers, employees, local communities… • On the management processes: new organizational processes, new indicators, diffusion of new values, new behavioral orientations… But for a capitalist firm, the key question is : does CSR pay? 3 P’s+ E STRATEGIES ( = CSR) Professor Georges Blanc 2012

3. Arguments in favor of CSR • It is in business's long-term self-interest – enlightened self-interest – to be socially responsible. • A second argument in favor of CSR is that it will ‘ward off government regulation’; business policies with self-disciplined standards will fulfill society's expectations. • “Business has the resources, thuslet business try” . Business has a reservoir of management talents, functional expertise and capital; many others have tried and failed to solve social problems, thus business should be given the chance(Davis,1973) • Pro-acting is better than reacting: anticipating, planning and initiating is more practical and less costly than simply reacting to socio-environmental problems once they have exploded( Carroll & Bucholtz, 2007) • Finally, business should engage in CSR because the public strongly supports it. Today, the public believes that, in addition to its pursuits of profits, business should be responsible to their workers, communities and other stakeholders, even if making things better for them requires companies to sacrifice some profits (Bernstein, 2000). Professor Georges Blanc 2012

4. Arguments against the concept of CSR 1- Milton Friedman(1962 ) holds that, if the free market cannot solve the social problems, this does not fall upon business, but upon government and legislation to do the job. 2- Business is not equipped to handle socio-environmental activities. Managers are oriented towards finance and operations and do not have the necessary expertise (social skills), to make Society oriented decisions (Davis, 1973). 3- CSR preoccupations will dilute businesses' primary purpose: to adopt CSR would put business into fields of activity that are unrelated to their ‘proper aim’ (Hayek, 1969). 4- Business already has enough power, and so why should we place in its hands the opportunity to wield additional power, such as social power? 5- By pursuing CSR, business will make itself less competitive globally. This is a controversial question that we are going to examine in the next slides. Professor Georges Blanc 2012

5. Is doing good profitable at the end? CSR investments represent to day between 10% and 20% of total investments in developed countries : for what “return”? Does creating value for every stakeholder prevents from shareholder value maximization? Do CSR actions have necessarily a cost which is not compensated by their benefits? In the US, some Boards and CEOs have been sued by minority shareholders for making CSR decisions that reduce immediate profit. Shareholders value maximization is included in the US law. It is not the case in France, Germany and Japan for instance, where the legal mission o the firm is its own long range existence. But on the other side, many recent researches are showing a positive economic return for companies CSR investments: investing in energy economies pays, selling shirts made of a cotton cultivated without pesticides pays, microfinance pays, reducing internal social tensions pays, developing projects with local communities pays…. All is a matter of time lag : Does it need patient capital? Or can we get immediate profit? Professor Georges Blanc 2012

6. Economic Outcomes Cost of Capital 1- SHAREHOLDER REVENUE MAXIMIZATION OR STAKEHOLDERS VALUE OPTIMIZATION ? Minimum Legal Standard Social /Ecological Outcomes Stakeholders model = Value should be distributed fairly between all stakeholders Finance Model = Maximize shareholders value Georges Blanc 2012

7. Sustainability 3Ps + E Strategies = higher economic outcomes Sustainability 3Ps + E Strategies = Lower economic outcomes Economic Outcomes Cost of Capital SHAREHOLDER REVENUE MAXIMIZATION ORSTAKEHOLDERS VALUE OPTIMIZATION Minimum Legal Standard New social & ecological objectives Social/ecological Outcomes Finance Model Stakeholders Model Georges Blanc 2012

8. A positive relationship through mediating variables SOCIAL PERFORMANCE Customer satisfaction Brand Loyalty Employees satisfaction Productivity Local communities satisfaction Local supports Government and agencies satisfaction Public support FINANCIAL PERFORMANCE (Margolis & Walsh-2007) SUSTAINABLE ADVANTAGE ( Porter & Kramer-2006- 2011) X Professor Georges Blanc 2012

9. CSR Indexes More and more companies are now introducing CSR measures in their basic Balance Scorecard. Some companies include CSR objectives on the first line of the BSC, at the same level of priority than the final profit objectives. 1st - The Kinder, Lydenberg, Domini (KLD) social performance index. The KLD index covers corporate performance regarding environmental, social and governance issues(KLD Research Analytics 2009). These issues include : • social issues include community, diversity, employee relations, human rights; • governance issues include reporting and structure; • controversial business issues include abortion, adult entertainment, alcohol, contraceptives, firearms, gambling, military, nuclear power and tobacco. 2nd - The Global Reporting Initiative (GRI) In addition to economic and environmental indicators, the Sustainability Reporting Guidelines (Global Reporting Initiative, 2006) identifies four categories of social performance indicators: • labor practices and decent work, • human rights, • society, • product responsibility. NOTE :The entry of a company into the KLD or the GRI index has a significant positive effect on its share value, as the deletion from the index has a strong negative effect on the share value. Professor Georges Blanc 2012

10. A conclusion : revisiting corporate strategy A sustainable corporate strategy goes through the strategic management of each stakeholder : • the shareholders; • every actor of the value chain, upstream (suppliers) and downstream (from distributors to final consumers) and any other partner(allied) of the chain; • the different categories of employees; • the stakeholders from the environment : local communities, local activists; • Government, public agencies and local authorities. Each stakeholder can be followed by a specific index measuring the value he receives. The basis of the relationships with the stakeholders are trust, justice, and collaboration. The value created by the activity of the firm should be distributed in a “fair way” between the different stakeholders, that is should be perceived as equitable by everybody. Any “disequilibrium” in the value distribution will jeopardize the sustainability of the firm. Professor Georges Blanc 2012