How far does corporate social responsibility go? What should a company do if the authorities in a foreign country are clearing away residential areas (and removing residents without any compensation) to make room for industrial development that may allow said company (and other companies in the same location) to expand its offshored manufacturing facilities? Interfere? Do nothing?

 

This question was posed in today's edition of "Dagens Næringsliv" (DN), the Norwegian equivalent of the "Wall Street Journal". Unfortunately it's only available in the printed edition, otherwise I would link to it. That said, there probably wouldn't be too many Norwegian-speaking readers in this forum anyway. The article centers around an alleged quote from Milton Friedman, "The business of business is business", a quote that is often seen as the direct opposite of social responsibility. While corporate social responsibility looks good on paper, how far are companies willing to not just talk the talk, but also walk the walk when push comes to shove?

 

The hypothetical example cited in DN actually referred to a ship owner, and the foreign authorities were harbor authorities, who were expanding a harbor in order to modernize its operations. While looking forward to a more efficient harbor, the company has just learned that the residential areas to be cleared are the homes of the poorest of the poorest who are simply removed without giving them any new place to live or any form of compensation. Add to that, the hypothetical company has just joined Global Compact, a UN strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. From this it would follow that the company should protest against these expansion plans. However, a formal protest may harm business, as the harbor authorities may react negatively to it and purposely (but not offcially) delay the loading and unloading of the company's vessels, leading to increased costs and lost time. What should the company do?

 

Øyvind Kvalnes, the article author who asks this question is Associate Professor at BI, the Norwegian School of Management, actually posted this question to his Master students, who most of them were in favor of that the company should actively deal with this issue, both from an ethical point of view, but also from a long-term economic perspective, as the market would be likely to reward action more than re-action, and because today's young people would want to work in such a company.

 

Underpinning his views, Kvalnes cites an old paper by Archie B Carroll from the University of Georgia, written in 1979: A three dimensional model of corporate social performance. In the paper, Carroll describes four possible reactions the company can use in this case: React, Defend, Accommodate and Lead.

React:

Deny any social responsibility, do nothing, saying that this is the local authorities responsibility, not their's.

 

Defend:

Admit that it has responsibility, but do as little as possible, just enough to maintain its reputation.

 

Accommodate:

Accept responsibility, and follow the advice of pressure groups and lobbyists who want the company to take action.

 

Lead:

Be responsible and take action before the media gets wind of the story, and go further than what is expected.

In addition to these four strategies for incorporating responsibility into business operations, Caroll also lists what he calls the four social responsibilities of business: Economic, Legal, Ethical, and Discretionary responsibility.

Economic Responsibility:

The first and foremost social responsibility of business is to produce goods and services that society wants and to sell these at a profit.

 

Legal Responsibility:

Society expects business to fulfill its economic responsibility, but within the framework of legal requirements.

 

Ethical Responsibility:

Although the first two already embody ethical norms, society has non-codified ethical norms which expect certain behaviors and attitudes in certain situations and which change over time and debate.

 

Discretionary Responsibility:

These are voluntary actions, guided only by a business' desire to engage in social roles that are not mandated, required by law, and not even generally expected.

The four responsibilities can provide a useful framework for any company that decides to do business in foreign countries, where politics and ethics don't always go hand in hand and where corruption is the order of the day. Many companies have already discovered the competitive advantage of claiming to be socially responsible. But how many companies are willing to go the whole nine yards. Are you?

 

References:

- Kvalnes, Ø. (2010) Hvilket samfunnsansvar? Dagens Næringsliv, 9.11.2010, s.4

- Carroll, A. (1979). A Three-Dimensional Conceptual Model of Corporate Performance. The Academy of Management Review, 4 (4), 497-505

It's Murphy's Law. Sooner or later it is bound to happen to everybody, and there's hardly a company who hasn't had a product recall of one sort or the other, and the Chinese toy industry seems to be particularly plagued with this issue. Is it a coincidence? Is China really to blame? In 2009, Mary B Teagarden, Professor of Global Strategy at the Thunderbird School of Global Management, wrote her article Learning from Toys: Reflections on the 2007 Recall Crisis, where she contends that much of blame lies with (American) businesses themselves.

 

I'll get to that in a moment, but first, let's remind ourselves of the original "Learning from Toys" article, if I may say so. Interestingly it is not mentioned by Teagarden in her references, albeit she uses the same line in her title. Learning from Toys: Lessons in Managing supply Chain Risk from the Toy Industry was written by M. Eric Johnson in 2001, and here the toy industry is used as a showcase example for how supply chain risks could and should be managed. Product recalls do not feature in this article; it is all about matching supply and demand and running the supply chain as  cost-efficient as possible. Outsourcing keeps operating costs down, which leaves more money for brand building and advertising.

 

How different things turned out six years later. The year 2007 will be remembered as the year the toy industry was shaken by a seemingly endless stream of recalls, says Teagarden. Much of the focus has been on China and its contractors, but China is not solely to blame, as many of the  risk drivers come from the companies who outsourced the production, not the Chinese manufacturers.

Instead of simply blaming China, we must take a hard look at American issues, those that we can control, that contribute to this problem. In so doing, we will see that we are a big part of this problem. American big box retailers and their unrelenting pressure on suppliers for ever-lower prices bear part of the responsibility. American importers focusing on cost and investing in brand rather than quality and supply chain integrity bear part of the responsibility. Parents who want low-priced toys in response to their children's requests for the latest television-advertised toy bear part of the responsibility. Finally, the American government's choice to chronically underfund watchdog agencies like the Consumer Product safety Commission is part of the problem.

This may sound harsh, perhaps, but true, part of the responsibility does belong to ourselves. Moreover, you could just as well replace "American" with "European" or any other country.

 

We do not control China. China controls China, Teagarden says. Although we can do whatever we can to influence China, we must also do our best to manage our share of the problem. Teagarden points to five lessons that can be learned from the toy recall crisis:

- Corporate social responsibility is a delicate balancing act
- Size matters
- Distance matters
- Supply chain development is critical in offshore manufacturing
- Trust not, verify all

The first lesson points to the adage of he who talks the talk, must also walk the walk. Words must be followed by actions, actions that ensure full supply chain integrity, end to end. This takes us to the second point. If you want to walk the talk, size matters. Simply put, the bigger you are, the more you can squeeze your supplier. And it is not about squeezing costs, that would be counter-productive, because the squeeze is simply passed on to the next tier in the chain, until one tier has no choice but to compromise on the requirements in order to make his profit. That is the third point, distance matters, elegantly captured in the Chinese proverb of "The mountains are high and the emperor is far away". Not only geographical distance, cultural distance, too, plays in important role here. This ties up with the fourth lesson, supplier development, where a company must invest time and effort in developing not only standards and principles on paper, but must invest in building skills and abilities in the supplier network. The final point, verification, is the culmination of the four previous lessons: supply chain vigilance, meaning that you can only trust so much, in order to be 100% sure you must verify, at all levels.

 

I find this a very thought-provoking article. Whichever way you put, it is not so much China who owns the tainted product problem. We do ourselves. China is just doing what we tell them to do (or rather, what we do not tell them not to do).

 

Reference: Teagarden, M. B. (2009) Learning from Toys: Reflections on the 2007 Recall Crisis. Thunderbird International Business Review, 51 (1), 5-17

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