IBLF Policy Paper 2003, Number 4

ECONOMIC MULTIPLIERS

Footnotes 1. Nelson, J. Business as Partners in Development: Building wealth for countries, companies and communities, PWBLF in collaboration with the World Bank and UNDP, 1996. This model of core business multipliers was developed further in Nelson, J. Building Competitiveness and Communities: How world class companies are creating shareholder value and societal value, PWBLF in collaboration with the World Bank and UNDP, 1998. 2. Nike v Kasky - a case dismissed by the U.S. Supreme Court in July 2003 on technical grounds which focused on the freedom of speech of corporations when talking about public policy issues and their social and environmental performance. 3 For one useful critique see Misguided virtue: False notions of Corporate Social Responsibility, by David Henderson. Institute of Economic Affairs, London, 2001. 4. Shell Report Profits or Principles: Does there have to be a choice?,1998 5. Citizens Charter to the UN, in response to the launch of the Global Compact, CorpWatch website. 6. Schwab, K. Get Back to Business. Article in Newsweek International, May 5 2003. 7. Davies, R and Nelson, J. The Buck Stops Where? Managing the Boundaries of Business Engagement in Global development Challenges. IBLF Policy Paper 2, January 2003. 8. Comments made by Lord Holme at meeting hosted by IBLF and UNDP to discuss the contribution of business to meeting the Millennium Development Goals, April 5th 2003. 9. Comments made by Bruce Klatsky at meeting hosted by IBLF and World Bank to discuss the boundaries of business in developing countries, January 22nd 2003. 10. Comments made by Phil Watts, Chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group, in a speech at the Royal Institute of International Affairs, London, July 5 2002. 11. Unilever Annual Review, 2003. 12. World Economic Forum Global Corporate Citizenship Initiative (www.weforum.org/) 13. This is a recognised accounting technique that has been promoted by

Revisiting the core responsibility and contribution of business to development

the Corporate Citizenship Company (www.corporatecitizenship.com) 14. Listening, learning, making progress. Unilever 2002 Social Review of 2001 data.

by Jane Nelson, July 2003

15. Commencement address delivered by Lord Browne to Colorado School of Mines, May 9th 2003. 16. Nelson, J and Moberg, J. Building Bridges: Opportunities and challenges for responsible private sector involvement in Iraq?s reconstruction. IBLF Policy Paper 3, June 2003. 17. Bughin, Jacques and Copeland, Thomas E. The virtuous cycle of shareholder value creation. The McKinsey Quarterly, 1997 18. Pralahad, C.K. and Hart, Stuart, L. The Fortune at the Bottom of the Pyramid. Strategy+Business, Issue 26, Reprint No. 02106 19. Logan, D The Business Response to HIV/Aids: Innovation and Partnership Global Business Council on HIV/Aids and IBLF, 1997 and Daley, K, The Business Response to HIV/Aids: Impact and lessons learned UNAIDS, Global Business Council on HIV/Aids and IBLF, 2000 20. Brew, P and House, F. The Business of Enterprise: Meeting the challenge of economic development through business and community partnerships. IBLF, 2001.

The International Business Leaders Forum is a not for profit organisation, founded in 1990 by HRH The Prince of Wales and a group of international CEOs, in response to the emerging social challenges of economic growth and change in the global economy. The IBLF’s mission is to promote international leadership in responsible business practices, to benefit business and society. It works strategically with business, civil society and the public sector in transition and emerging economies in order to achieve socially, economically and environmentally sustained development. Acknowledgements This paper draws on ten years’ of the IBLF’s work. Thanks to Nick Claridge and Joe Phelan for their support in designing and producing this document.

21. Nelson, J and Prescott, D. Business and the Millennium Development Goals: A framework for Action. IBLF in collaboration with UNDP, 2003. 22. The Virtuous Circle: Electronic payments and economic growth. A white paper prepared by VISA International and Global Insight, 2003. 23. This draws from a framework developed in Profits with Principals: Seven principles for building trust and competitiveness, by Ira Jackson and Jane Nelson, Doubleday (forthcoming, 2004). Another forthcoming book written by IBLF staff is Corporate Social Opportunity, by Adrian Hodges and David Grayson, Greenleaf (forthcoming, 2004). 24. Business and economic development. AccountAbility, Business for Social Responsibility and Brody, Weiser Burns, June 2003

For more information, please consult IBLF’s website: www.iblf.org IBLF, 15 – 16 Cornwall Terrace, Regent’s Park, London, NW1 4QP, UK Tel: + 44 (0)207 467 3667 Fax: +44 (0)207 467 3610 E-mail: [email protected]

What can the private sector really contribute to development? Do companies help to raise standards in developing countries? From the outset of the IBLF’s existence in 1990, we have focused our efforts on answering these and other questions by addressing the core business contribution that companies make to development. While recognising the important roles of philanthropy and compliance, we have argued that the greatest contribution that companies can make to society, especially in developing countries, is through responsible, efficient and profitable mainstream investment that produces a variety of socio-economic multipliers. In 1996, working with the World Bank and with the United Nations Development Programme, we identified eight of these ‘core business multipliers’1. They have all too often been overlooked and undervalued in the corporate social responsibility debate. As the CSR debate gains maturity we feel it is useful to revisit and remind ourselves of the contribution that these multipliers can make to spreading economic opportunity and supporting sustainable development. This is particularly important given the growing emphasis on the costs and benefits of globalisation and heightened awareness on the need for local solutions. The eight core business multipliers: 1. Generate investment and income 2. Produce safe products and services 3. Create jobs 4. Invest in human capital 5. Establish local business linkages 6. Spread international business standards 7. Support technology transfer 8. Build physical and institutional infrastructure

© International Business Leaders Forum, July 2003

During the past decade the field of corporate social responsibility (CSR) has moved from the margins of the corporate agenda to the mainstream. For most leading companies it has advanced beyond legal compliance and beyond philanthropy to address core business issues such as risk management, innovation and value creation. It has created a global network of practitioners, consultants and academics and resulted in new market mechanisms, regulations and voluntary initiatives, plus a variety of management tools and guidelines. Issues related to corporate social responsibility have become familiar subjects in the international business media and conference circuit, and have even been the subject of a recent U.S. Supreme Court Case.2 At the same time, CSR has become the focus of increasing criticism from some very different perspectives. Four of the most common critiques are as follows: First, there are those who continue to argue that the sole corporate responsibility of business is to make profits and obey the law, within a minimalist legal framework. They argue that adhering to the principles of CSR raises costs and prices, increases regulations and may actually reduce society’s welfare rather then enhance it.3 We would agree that profitability and basic legal compliance are crucial foundations for responsible business. They are not sufficient, however, in today’s world where new

societal expectations are creating reputation and litigation risks for companies that fail to demonstrate and account for their performance against responsible business principles and values. As Sir Mark Moody-Stuart, chairman of Anglo American and former Chairman of Shell has observed, “Without profits, no private company can sustain principles. Without principles, no company deserves profits.” 4 Second, there are those who argue the case for comprehensive global regulation of business behaviour. They base this on the rationale that many companies cannot be trusted to behave responsibly on a voluntary basis, regardless of the values and principles they profess to have. A group of over 80 NGOs and academics, for example, has called on the UN for such regulation. They argue that, “Multinational corporations are too important for their conduct to be left to voluntary and self-generated standards. A legal framework, including monitoring, must be developed to govern their behaviour on the world stage.”5 We would argue that the advocates of such an approach have given insufficient thought to the practical challenges of implementing, monitoring and sanctioning a global regulatory framework that aims to cover all CSR-related issues (economic, social, environmental and ethical) in all countries, all industry sectors and all major companies. This is in addition to the

fact that many developing country governments have capacity problems in implementing existing environmental, labour and human rights conventions agreed at the level of nation-states, let alone a more detailed set of standards aimed at business. A focus on building public sector capacity to implement existing international agreements would seem the best use of resources at present.

when he argued in a May 2003 Newsweek article, “Even before recent scandals, responsibilities that used to be the purview of governments – like fighting poverty, guaranteeing public health and protecting the environment – have been handed over to corporations, as if businesses were bottomless pits of money whose sole function was to provide social benefits to the world. Now may be the time to re-examine these assumptions, because the role of business has become confusing. In this era of slowing economic-growth, we must re-embrace the wealth-enhancing, job-creating role that business plays in society. And business leaders must again take the lead, offering up an assertive, positive vision of their function in the world at large.” 6

Having said this, there is clearly a need to ‘level the playing field’ and ensure that laggard companies are held to a greater level of accountability on core ethical, corporate governance, labour, environmental and human rights standards. This calls not only for capacity building, but also for increased dialogue between representative business organisations, government bodies and civil society to negotiate the most appropriate balance between regulatory frameworks, fiscal incentives, market mechanisms and voluntary business initiatives. Such dialogue should lead to interventions that influence corporate behaviour for all major companies, not only the leaders, but do so in a manner that is most likely to be efficient and effective. In some cases this may involve extra regulation, but not necessarily. Even if legislation does ensue, companies that engage in its formulation stand to benefit.

We agree in certain circumstances that there is a danger of governments and other stakeholders expecting too much of business and/or failing to reciprocate in terms of their own responsibilities and accountability. Once again, this points to a growing need for regular stakeholder dialogue, by both individual companies and industry bodies, to debate the appropriate boundaries of corporate responsibility vis a vis that of governments and civil society actors. The challenge of defining and managing such boundaries was the focus of an earlier IBLF policy briefing, Number 2, January 2003. 7

Third, there are a growing number of business leaders, academics and others who worry that too much is being expected of the private sector in a period of massive competition, economic downturn and political uncertainty. Klaus Schwab, President of the World Economic Forum, spoke for many

A fourth and final critique argues that all too often CSR is positioned as an ‘add-on’ to a company’s core business activities and economic development impact, rather than recognising these as central to what CSR is all about. As Lord Holme, former Deputy Chair of Business Action for Sustainable Development

2 ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT

and an adviser to Rio Tinto observes, “We need to get better at measuring and communicating the contribution that companies make to economic development.”8 This is a comment echoed by Bruce Klatsky, Chairman and CEO of Phillips-Van Heusen, “We need to do a better job at raising awareness of the development benefits of successful, legal, well-governed private investment.” 9 We agree that producing goods and services in a way that meets customer needs or aspirations and generates profits is a central part of a company’s social responsibility in its own right. If done in a manner that moves beyond legal compliance to reflect international norms and standards in areas such as corporate governance, human rights, labour, the environment and bribery and corruption, these core business activities and their economic multipliers can make a major difference to people’s lives and to tackling global poverty. This policy briefing focuses on that contribution. A quote from Sir PhillipWatts, Chairman of Shell, is a good place to start in emphasising the contribution of a company’s core business activities. He points out, “Our primary impact is through our business. We also participate in what might be called ‘catalytic engagement’ with others – for example through the World Business Council for Sustainable Development, the International Chamber of Commerce, the Shell Foundation and the range of community programs carried out throughout the world. To put the distinction in money terms, we are responsible for $20 billion invested in business every year on behalf of ourselves and our partners, and $140

Conclusion The eight “economic multipliers” outlined in this policy brief illustrate ways in which profitable and responsible businesses can contribute to development through the impact of their core business operations - in the workplace, in the marketplace and along the supply chain. In optimising the impacts of these economic multipliers, companies can create both shareholder value-added and societal value-added, which we define as the creation of wider economic, social and environmental value. Four key strategies that companies can employ in creating both shareholder value-added and societal value-added are: compliance; charity; control of risks, costs and liabilities; and creation of new value.23 These strategies are not mutually exclusive – in fact outstanding companies will excel in all four, viewing them as building blocks for performance excellence: • Compliance – complying with the law and industry standards is fundamental, but not sufficient in meeting or exceeding societal expectations. At best, it will protect the company’s ‘licence to operate’ and its shareholder value. • Charity – corporate philanthropy or social investment are also beneficial and can contribute societal value-added, especially to local communities, but they are unlikely to have a major impact on adding to shareholder value-added, beyond their positive impact on employee morale and motivation and some reputation and relationship benefits. Nor are they

adequate in tackling the development challenges that exist in most countries where multinational companies operate • Control – controlling or managing the company’s risks, costs, liabilities, and negative impacts is also fundamental to the protection and in some cases the enhancement of shareholder value. It is unlikely, however, to create major new value for society beyond doing ‘no harm’ to stakeholders and minimizing a company’s environmental footprint. • Create New Value – the creation of new value through innovation in products, services, processes, markets, alliances and business models has the greatest potential for delivering benefits to both shareholders and society. It moves companies from a mindset of ‘do no harm’ to ‘do positive good’ and from a framework of corporate social responsibility to corporate social opportunity.

In conclusion, the private sector can make a vital contribution to development and many companies are already doing so. Through responsibly managing their core business activities and harnessing their core business competencies, these companies are moving beyond compliance, risk management and philanthropy to deliver innovative, competitive and profitable solutions to development. Governments, the media, academia and civil society actors need to offer more recognition and support for such companies. At the same time, business leaders can play a crucial role themselves. They can act as ambassadors for values-driven leadership by speaking out on the role of business in addressing international development and governance issues. They can also mobilise their boards of directors, their managers and the young people who are the next generation of business leaders to promote responsible business.

Another useful analysis of how companies are managing their economic impact to benefit society has recently been produced by AccountAbility, Business for Social Responsibility and Brody Weiser Burns.24 The World Resources Institute Sustainable Enterprises programme and the WBCSD’s Sustainable Livelihoods initiative also offer useful models on the economic development role of the private sector.

ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT 11

The eight core economic multipliers continued

• Institutional infrastructure such as appropriate legal, financial and accounting systems and standards, local stock exchanges and banking capacity, and local chambers of commerce, organisations of employers and other business associations and networks that help to shape market frameworks and support private enterprise development. In the case of physical infrastructure, companies in sectors such as water, electricity, waste management, telecommunications, construction and engineering, energy, mining, agri-business and manufacturing, clearly have a key role to play in providing the capital, technology and management expertise for this crucial building block of development. Logistics and transportation companies, such as DHL and UPS, also play a valuable role in increasing the physial connections between businesses and countries. This can be especially important when other forms of transport infrastructure are inadequate, or have been damaged by natural disasters or wars. There is great debate on the most appropriate roles of the public and private sector when it comes to physical infrastructure that delivers ‘public goods’ such as water, energy and housing. Water is a particularly sensitive issue. The United Nations and the World Bank argue, however, that private capital and management expertise are essential, in partnership with government and civil society, if the world is going to meet its Millennium Development target of halving, by 2015, the proportion of people without access to safe drinking water. 21

In terms of institutional infrastructure, financial and professional service firms such as KPMG, PricewaterhouseCoopers, Accenture, Deloitte Touche Tohmatsu, Marsh and McLennan, McKinsey & Company, Standard Chartered, Citigroup, Morgan Stanley and others can play a particularly important role. They can support governments in the modernization of financial institutions and improve the effectiveness and efficiency of regulatory frameworks in areas such as property rights, company and competition law, privatisation and market liberalization. In certain cases they can help to train government officials, build the capacity of government bodies and restructure financial and economic institutions. Effective institutional infrastructure is important not only at a national level, but also at an international level. One example is global electronic payments. As VISA International argues in a recent publication, “...the system of electronic payments promotes economic growth by providing fundamental benefits such as a safe, sound and predictable international payments network connecting buyers and sellers; everincreasing levels of security and consumer empowerment; greater economic transparency; increased economic stimulation; and widened participation in the banking system.”22 The development of institutional frameworks to trade and manage greenhouse gas emissions is another example of institutional innovations where the private sector is playing an important role. The Greenhouse Gas Protocol, for example, is a coalition of businesses, NGOs, and

10 ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT

government bodies, initiated by the World Resources Institute and the World Business Council for Sustainable Development. It aims to develop internationally accepted accounting and reporting standards on greenhouse gas emissions and provide practical tools to help companies manage their emissions. The Global Reporting Initiative is another innovative multi-stakeholder network, that aims to develop international reporting guidelines and indicators for sustainability reporting. Its framework is now being used formally and informally by over 150 of the world’s leading companies as they work towards greater transparency and accountability on their economic, social and environmental performance. A final example of ‘institutional infrastructure’ is the international trade system. Some major companies are taking a leadership role to support the Doha Trade Round and to advocate for increased access to developed country markets for developing countries, especially in the area of agricultural products. Senior executives in companies such as Unilever, Nestlé and Chevron Texaco, for example, have spoken out publicly on the need for a review of agricultural subsidies in Europe and the United States.

million in donations. This level of catalytic engagement is not small but is dwarfed by the beneficial impact of our day-to-day business.”10 This point is also emphasised by Unilever in their Annual Review of 2002, “We regard the very business of doing business in a responsible and sustainable way as the core of our corporate social responsibility: selling products that meet local consumers’ needs, investing in productive capacity, spreading our technical know-how, working in partnerships through the value chain and in local communities, and making environmental responsibility a central business practice.” 11 This view is shared by a group of over 40 chairmen and CEOs from 18 industry sectors and with companies headquartered in 16 countries. They stated in the Global Corporate Citizenship statement developed by the World Economic Forum in partnership with the IBLF, “First and foremost, our companies’ commitment to being global corporate citizens is about the way we run our own businesses.” 12 In the following sections we outline eight core business multipliers. If managed in a way that minimises their negative impacts and maximises their positive impacts on stakeholders, these eight core business multipliers can make an enormous contribution to building more prosperous, equitable and peaceful societies.

The eight core economic multipliers Generate investment and income

1

Companies can play a vital role to increase capital investment and inject cash into local, regional and national economies. They can do this in the following ways: • Paying wages to local employees, taxes and other royalties to host governments, timely payment to suppliers, dividends to investors, interest to banks, and grants, donations or social venture capital funds to local non-profit organisations or community groups. • Reinvesting back in the local business for future growth, research and development. • Earning foreign exchange. • Investing in local operations and transportation facilities. The cash generated by a successful business and paid out to different stakeholders can have a valuable multiplier effect, especially within local communities, but also more widely at a national or regional level.

Working with the Corporate Citizenship Company13, several companies have started to report on what they call their cash value added (CVA). These companies include SABMiller, HSBC, Diageo and Unilever. This is a useful metric that any company could adopt. In the words of Unilever, “This calculates the wealth created in monetary terms through the value that our operations add to the raw materials and services we buy in, calculated as the difference between income from customers and payments out to suppliers. The value created is then available to be distributed to employees, governments, providers of capital and local communities. Some is retained in the business or invested for future growth – that is, for the benefit of stakeholders in the future.” 14 We illustrate this metric below, drawing on the case of SABMiller, which was a pioneer in its use. The actual allocation of cash value added tends to vary depending on both the industry sector and the countries of operation, with a higher percentage tending to go to governments in most developing countries.

Source: SABMiller Corporate Accountability Report, 2003

ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT 3

The eight core economic multipliers continued

Speaking to a group of university students in the United States in May 2003, BP’s Chief Executive Lord Browne, captured the wealth multiplier as follows, “Companies do exist to make money – and there’s nothing wrong with that. We create wealth for those who invest in us, we create jobs and income for our staff, and we create wealth for nations and local communities by developing resources. Though it isn’t a target in our planning, we are one of the largest tax payers in the world, and those taxes fund a great many other activities and public services. We’re also one of the largest single funders of pensions in the world because income paid out through our dividends helps to meet the needs of millions of pensioners around the world. So we need to make money …but we exist for the long-term.” 15 The transparency with which companies declare their payments to host governments and the manner in which governments then use this revenue has attracted growing attention through campaigns such as Publish What You Pay, initiated by Global Witness with support from George Soros. The British Government played a leadership role in launching the Extractive Industry Transparency Initiative (EITI) in September 2002, which has resulted in agreements between several major extractive sector companies and developing country governments to increase transparency on what they pay and receive respectively. Although still at an early stage, it is likely that this initiative will grow in terms of both the number of countries supporting it and its extension into other industry sectors, such as infrastructure. In terms of the oil industry, it could

offer an especially useful framework for building trust in Iraq, as the industry there opens up to foreign investment and privatisation (see IBLF Policy Paper, Number 3, June 2003) 16. It is also likely that campaigning groups and socially responsible investment funds will start to pay increased attention to what companies are paying in taxes, not only in developing countries, but also in the United States and Europe. Another issue related to the generation of income that has been the focus of increased shareholder and media attention in the past two years, has been executive compensation. Most notable has been the growing backlash against: the increased gap between executive packages and average worker pay; the debate on whether to expense share options; and concern about large amounts paid to executives in companies that have not delivered in terms of shareholder performance. These are all issues that business leaders are increasingly being called on to address and explain their own company’s position on. In the majority of cases, however, the cash value added that is generated by successful and profitable companies makes an important contribution to stakeholders and economic development. In their 1997 McKinsey Quarterly article “The Virtuous Cycle of Shareholder Value Creation”, Jacques Bughin and Thomas Copeland report that, “…we studied the performance of 2,700 companies from 20 countries over a ten-year period. We found that a focus on shareholder value boosts

4 ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT

productivity and liberates resources that benefits stakeholders of all kinds in the long term…”17 Generating wealth through running efficient and customer-responsive businesses, and then having a transparent and accountable process for distributing this wealth among shareholders and other stakeholders, including re-investment back in the company’s own development, is one of the single most important contributions that any company makes to society.

Produce safe products and services

2

All companies produce goods and services either for end-use consumers or intermediary customers. The quality, value, affordability, safety and environmental impacts of these products and services are central components of corporate social responsibility. Companies in a wide range of industry sectors have started to undertake innovative and farreaching actions in all or some of the following areas: • Understanding and managing impacts along the full product lifecycle, from sourcing to manufacturing, marketing, distribution, product end-use and disposal; • Investing in the quality, health, safety and environmental components of the product or service; • Adapting existing brands or developing new brands that meet local needs, tastes and cultural diversity;

The IBLF’s report “The Business of Enterprise”, profiles examples from over 50 companies around the world that are developing such linkages and helping to create not only jobs and new skills, but also locallyowned, competitive enterprises that operate to sound quality standards and in some cases other international standards. 20 Companies that have played a leadership role in this area of economic empowerment and small enterprise development include Anglo American, Coca-Cola, DaimlerChrysler, Ford Motor, Unilever, Nestlé, Citigroup, Diageo, Rio Tinto, BP, and Shell. With support from the Ford Foundation, the IBLF is now working on a project to analyse and promote collective action on small enterprise development in Poland, Zambia, Vietnam and Indonesia.

Spread international business standards

6

Multinational companies can harness their global, national and local value chains to spread internationally accepted standards in areas such as: • Corporate governance and sound ethical practices, including frameworks to tackle bribery and corruption; • Quality management, operational or process management systems; • Health, safety, environment and product safety; • Labour and human rights. This can be done on an individual company basis, but also on a collective basis. The Global Compact

is one example focused on spreading corporate awareness of and commitment to international business standards in the areas of the environment, labour and human rights. A growing number of IBLF companies are also engaged in sector initiatives that aim to spread good practices across specific industry sectors. One example is the US and UK Voluntary Guidelines on Security and Human Rights, which involve US and UK mining and energy companies, as well as NGOs and the UK and US governments, expanding soon to involve other countries. Other sector initiatives include: the Fair Labour Association; the Ethical Trading Initiative; the Marine and Forest Stewardship Councils; the Sustainable Agriculture Initiative; and the Equator Principles signed by banks active in project finance. These and other initiatives illustrate how companies are starting to take a more pro-active role to spread international good practice not only along their individual value chains, but also collectively in their industry sector. The IBLF has played a role in several sector-led initiatives, offering co-ordination services and facilitating multi-stakeholder dialogue.

Support technology transfer

7

Most companies have technologies and technical skills that can be shared with and/or adapted to the needs of host countries and communities. This can include:

• Locating research and development facilities in host countries; • Linking hardware (i.e. equipment, information technology and materials) to software (i.e. local training, skills development, managerial systems); • Implementing technologies for cleaner and safer production and product distribution; • Researching, carrying out due diligence and managing the potential negative consequences of new technologies. A number of IBLF companies have established R&D facilities and major operations in developing countries. Others are transferring cleaner production technologies and processes to these countries, either directly through their own subsidiaries and supply chains or in partnership with UN bodies such as UNEP, UNIDO and UNDP.

Build physical and institutional infrastructure

8

Finally, large companies, operating either individually or on a collective basis and depending on the industry in question, can play a valuable role in contributing to a nation’s infrastructure. This can include both physical and institutional infrastructure, the lack of which are often cited as major impediments to private sector investment, national progress and development: • Physical infrastructure such as plant and machinery, roads and other transportation systems, telecommunications, water and sanitation services, domestic and industrial waste management facilities, and energy;

ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT 9

The eight core economic multipliers continued

Coca-Cola and Unilever are two companies that have researched their job multipliers in selected emerging markets. In China, South Africa and parts of Central and Eastern Europe, for example, research carried out by the Universities of Cambridge and South Carolina, found that between six and eight jobs were supported along the Coca-Cola system’s local value chain, for every direct job created by the company. Research by Unilever in Indonesia results in similar figures, showing that in 2001 an estimated eight jobs were supported along the company’s supply and distribution chains, for each person employed directly by the company. Looking for ways to minimise the trauma and other human costs associated with corporate restructuring or job losses is another key issue for companies to consider in this area. Media stories of people fired by text message or in large undignified conferences have done much to raise mistrust of the private sector in recent years. While job cuts are sometimes unavoidable, especially in difficult economic circumstances, policies can be put in place to handle them with compassion, sensitivity and practical support. Accenture and Cisco Systems provide positive examples of two companies that have offered their staff an opportunity to work on community projects, on a lower salary, during periods of economic downturn. Such an approach can help to manage costs and headcount while offering creative alternatives to a full-time job. Other companies offer career guidance, counselling, funds for start-up businesses, support for job searches and retraining.

Invest in human capital

4

Offering employees and business partners access to training, professional development and occupational health services is a fourth key contribution that companies can make to society. It is one that can have a highly valuable multiplier effect in developing economies, where skills shortages and inadequate management or administrative capacity, in both the public and private sectors, are key constraints to development. Companies can support human capital development through: • Training programmes for employees in the workplace; • Training and capacity building for joint venture partners, local contractors and suppliers and other relevant business partners; • Implementing occupational health and safety programmes for employees and contractors; • Tackling HIV/Aids, where relevant, in the workplace through awareness, prevention, treatment and care programmes; • Investment in research and education initiatives in local universities and schools, aimed to support industry-specific needs, as well as broader national economic development needs. In recent years the challenge of tackling HIV/Aids in the workplace has risen to prominence for companies operating in Africa, Latin America and increasingly in India, Russia and China. Many of the member companies of the IBLF have established innovative and farreaching workplace programmes over the past few years. Anglo American

8 ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT

played a pioneering role in being the first major company to agree to provide anti-retroviral drugs free of charge to its employees who need them. GlaxoSmithKline also played a leadership role within the pharmaceutical sector by being one of the first companies to move beyond philanthropy to implement a more integrated and mainstream business strategy on access to HIV/Aids drugs. The IBLF has profiled other examples of good practice in its two reports on Business and HIV/Aids. 19 On a collective corporate basis, the work of the Global Business Coalition on HIV/Aids, which the IBLF worked closely with in its early stages, plays an important advocacy, leadership and information-sharing role. The Global Health Initiative of the World Economic Forum is another useful source of good practice on partnerships.

Establish local business linkages

5

A fifth contribution that large companies can make to development is to build local business linkages along the corporate value-chain, especially with medium, small and micro-enterprises. This can be achieved through large companies establishing: • Backward or upstream relationships such as sourcing of raw materials and procurement of other local inputs and services; • Forward or downstream relationships such as product distribution, delivery, servicing and disposal activities.

• Ensuring affordability and improved access in the case of basic or essential goods and services such as water, housing, energy, food and beverage, basic household consumer goods, information technology, credit for small-scale and micro-enterprises, and essential medicines. In terms of life-cycle assessment, the sector initiatives being undertaken by the World Business Council for Sustainable Development have been useful in illustrating the different risks and opportunities that key industry sectors face along the entire life-cycle of their products and services. These have included the sustainable paper cycle study, the mobility initiative, the cement initiative, and the mining minerals and sustainable development initiative. One of the most useful sustainability metrics that has been developed by an individual company, is a measure being used by DuPont that tracks the volume of materials used in the production of its products against the shareholder value created. This aims to help the company in its goal to deliver more value to consumers and shareholders with less resources or materials, thereby meeting customer’s needs with less of an environmental footprint. This metric is being enhanced to also consider the number of people reached, as DuPont, among other companies, looks at ways to reach out to low income consumers. A growing number of companies are researching economically viable solutions to deliver affordable, good quality products to low-income communities. This is especially

important in the area of essential goods and services such as water, energy and life-saving medicines, but also offers potential in terms of safe and nutritious branded foods, beverages, and household and personal goods. In their ground-breaking research on the four billion people who live at the bottom of the world’s economic pyramid on less than $1,500 per year, C.K. Pralahad and Stuart Hart, argue that, “This is a time for MNCs to look at globalization through a new lens of inclusive capitalism. For companies with the resources and persistence to compete at the bottom of the world economic pyramid, the prospective rewards include growth, profits and incalculable contributions to humankind. …Collectively, we have only begun to scratch the surface of what is the biggest potential market opportunity in the history of commerce.” 18 They estimate that this group of people, who could swell to six billion over the next 40 years, represents a multi-trillion dollar market if companies can develop innovative new business models, new technologies and new product and service offers to reach these people on a profitable basis. Another growing issue in producing and delivering safe products and services is the health and nutrition impacts of the food and beverage sector. As public health concerns about obesity and its related diseases have grown in more affluent countries and population groups, and concerns about hunger and malnutrition persist in low-income countries and population groups, these companies have new opportunities and risks to tackle. Since 2002, the IBLF has been

The quality, value, affordability, safety and environmental impacts of a company’s products and services are central components of its corporate social responsibility. hosting a series of dialogues with food and beverage companies, the sporting industry, WHO and others to address some of the challenges associated with consumer nutrition and lifestyle. It has also been involved in the work of the Global Alliance for Improved Nutrition (GAIN).

Create jobs

3

Employment creation is another potential benefit resulting from private sector investment in developing economics and lowincome communities. Companies can support national and local employment generation goals by: • Creating direct jobs at all levels of operations and management for local employees, including women and ethnic minorities wherever possible; • Supporting jobs along local and global supply and distribution chains; • Aiming to minimise the economic and social costs associated with corporate restructuring, downsizing and other major change.

ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT 5

+$$$= +$$$ $$$ $= Va $ Value alue

+$$$= +$$$ $$$ $= Va $ Value alue

The eight core economic multipliers continued

Coca-Cola and Unilever are two companies that have researched their job multipliers in selected emerging markets. In China, South Africa and parts of Central and Eastern Europe, for example, research carried out by the Universities of Cambridge and South Carolina, found that between six and eight jobs were supported along the Coca-Cola system’s local value chain, for every direct job created by the company. Research by Unilever in Indonesia results in similar figures, showing that in 2001 an estimated eight jobs were supported along the company’s supply and distribution chains, for each person employed directly by the company. Looking for ways to minimise the trauma and other human costs associated with corporate restructuring or job losses is another key issue for companies to consider in this area. Media stories of people fired by text message or in large undignified conferences have done much to raise mistrust of the private sector in recent years. While job cuts are sometimes unavoidable, especially in difficult economic circumstances, policies can be put in place to handle them with compassion, sensitivity and practical support. Accenture and Cisco Systems provide positive examples of two companies that have offered their staff an opportunity to work on community projects, on a lower salary, during periods of economic downturn. Such an approach can help to manage costs and headcount while offering creative alternatives to a full-time job. Other companies offer career guidance, counselling, funds for start-up businesses, support for job searches and retraining.

Invest in human capital

4

Offering employees and business partners access to training, professional development and occupational health services is a fourth key contribution that companies can make to society. It is one that can have a highly valuable multiplier effect in developing economies, where skills shortages and inadequate management or administrative capacity, in both the public and private sectors, are key constraints to development. Companies can support human capital development through: • Training programmes for employees in the workplace; • Training and capacity building for joint venture partners, local contractors and suppliers and other relevant business partners; • Implementing occupational health and safety programmes for employees and contractors; • Tackling HIV/Aids, where relevant, in the workplace through awareness, prevention, treatment and care programmes; • Investment in research and education initiatives in local universities and schools, aimed to support industry-specific needs, as well as broader national economic development needs. In recent years the challenge of tackling HIV/Aids in the workplace has risen to prominence for companies operating in Africa, Latin America and increasingly in India, Russia and China. Many of the member companies of the IBLF have established innovative and farreaching workplace programmes over the past few years. Anglo American

8 ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT

played a pioneering role in being the first major company to agree to provide anti-retroviral drugs free of charge to its employees who need them. GlaxoSmithKline also played a leadership role within the pharmaceutical sector by being one of the first companies to move beyond philanthropy to implement a more integrated and mainstream business strategy on access to HIV/Aids drugs. The IBLF has profiled other examples of good practice in its two reports on Business and HIV/Aids. 19 On a collective corporate basis, the work of the Global Business Coalition on HIV/Aids, which the IBLF worked closely with in its early stages, plays an important advocacy, leadership and information-sharing role. The Global Health Initiative of the World Economic Forum is another useful source of good practice on partnerships.

Establish local business linkages

5

A fifth contribution that large companies can make to development is to build local business linkages along the corporate value-chain, especially with medium, small and micro-enterprises. This can be achieved through large companies establishing: • Backward or upstream relationships such as sourcing of raw materials and procurement of other local inputs and services; • Forward or downstream relationships such as product distribution, delivery, servicing and disposal activities.

• Ensuring affordability and improved access in the case of basic or essential goods and services such as water, housing, energy, food and beverage, basic household consumer goods, information technology, credit for small-scale and micro-enterprises, and essential medicines. In terms of life-cycle assessment, the sector initiatives being undertaken by the World Business Council for Sustainable Development have been useful in illustrating the different risks and opportunities that key industry sectors face along the entire life-cycle of their products and services. These have included the sustainable paper cycle study, the mobility initiative, the cement initiative, and the mining minerals and sustainable development initiative. One of the most useful sustainability metrics that has been developed by an individual company, is a measure being used by DuPont that tracks the volume of materials used in the production of its products against the shareholder value created. This aims to help the company in its goal to deliver more value to consumers and shareholders with less resources or materials, thereby meeting customer’s needs with less of an environmental footprint. This metric is being enhanced to also consider the number of people reached, as DuPont, among other companies, looks at ways to reach out to low income consumers. A growing number of companies are researching economically viable solutions to deliver affordable, good quality products to low-income communities. This is especially

important in the area of essential goods and services such as water, energy and life-saving medicines, but also offers potential in terms of safe and nutritious branded foods, beverages, and household and personal goods. In their ground-breaking research on the four billion people who live at the bottom of the world’s economic pyramid on less than $1,500 per year, C.K. Pralahad and Stuart Hart, argue that, “This is a time for MNCs to look at globalization through a new lens of inclusive capitalism. For companies with the resources and persistence to compete at the bottom of the world economic pyramid, the prospective rewards include growth, profits and incalculable contributions to humankind. …Collectively, we have only begun to scratch the surface of what is the biggest potential market opportunity in the history of commerce.” 18 They estimate that this group of people, who could swell to six billion over the next 40 years, represents a multi-trillion dollar market if companies can develop innovative new business models, new technologies and new product and service offers to reach these people on a profitable basis. Another growing issue in producing and delivering safe products and services is the health and nutrition impacts of the food and beverage sector. As public health concerns about obesity and its related diseases have grown in more affluent countries and population groups, and concerns about hunger and malnutrition persist in low-income countries and population groups, these companies have new opportunities and risks to tackle. Since 2002, the IBLF has been

The quality, value, affordability, safety and environmental impacts of a company’s products and services are central components of its corporate social responsibility. hosting a series of dialogues with food and beverage companies, the sporting industry, WHO and others to address some of the challenges associated with consumer nutrition and lifestyle. It has also been involved in the work of the Global Alliance for Improved Nutrition (GAIN).

Create jobs

3

Employment creation is another potential benefit resulting from private sector investment in developing economics and lowincome communities. Companies can support national and local employment generation goals by: • Creating direct jobs at all levels of operations and management for local employees, including women and ethnic minorities wherever possible; • Supporting jobs along local and global supply and distribution chains; • Aiming to minimise the economic and social costs associated with corporate restructuring, downsizing and other major change.

ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT 5

The eight core economic multipliers continued

Speaking to a group of university students in the United States in May 2003, BP’s Chief Executive Lord Browne, captured the wealth multiplier as follows, “Companies do exist to make money – and there’s nothing wrong with that. We create wealth for those who invest in us, we create jobs and income for our staff, and we create wealth for nations and local communities by developing resources. Though it isn’t a target in our planning, we are one of the largest tax payers in the world, and those taxes fund a great many other activities and public services. We’re also one of the largest single funders of pensions in the world because income paid out through our dividends helps to meet the needs of millions of pensioners around the world. So we need to make money …but we exist for the long-term.” 15 The transparency with which companies declare their payments to host governments and the manner in which governments then use this revenue has attracted growing attention through campaigns such as Publish What You Pay, initiated by Global Witness with support from George Soros. The British Government played a leadership role in launching the Extractive Industry Transparency Initiative (EITI) in September 2002, which has resulted in agreements between several major extractive sector companies and developing country governments to increase transparency on what they pay and receive respectively. Although still at an early stage, it is likely that this initiative will grow in terms of both the number of countries supporting it and its extension into other industry sectors, such as infrastructure. In terms of the oil industry, it could

offer an especially useful framework for building trust in Iraq, as the industry there opens up to foreign investment and privatisation (see IBLF Policy Paper, Number 3, June 2003) 16. It is also likely that campaigning groups and socially responsible investment funds will start to pay increased attention to what companies are paying in taxes, not only in developing countries, but also in the United States and Europe. Another issue related to the generation of income that has been the focus of increased shareholder and media attention in the past two years, has been executive compensation. Most notable has been the growing backlash against: the increased gap between executive packages and average worker pay; the debate on whether to expense share options; and concern about large amounts paid to executives in companies that have not delivered in terms of shareholder performance. These are all issues that business leaders are increasingly being called on to address and explain their own company’s position on. In the majority of cases, however, the cash value added that is generated by successful and profitable companies makes an important contribution to stakeholders and economic development. In their 1997 McKinsey Quarterly article “The Virtuous Cycle of Shareholder Value Creation”, Jacques Bughin and Thomas Copeland report that, “…we studied the performance of 2,700 companies from 20 countries over a ten-year period. We found that a focus on shareholder value boosts

4 ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT

productivity and liberates resources that benefits stakeholders of all kinds in the long term…”17 Generating wealth through running efficient and customer-responsive businesses, and then having a transparent and accountable process for distributing this wealth among shareholders and other stakeholders, including re-investment back in the company’s own development, is one of the single most important contributions that any company makes to society.

Produce safe products and services

2

All companies produce goods and services either for end-use consumers or intermediary customers. The quality, value, affordability, safety and environmental impacts of these products and services are central components of corporate social responsibility. Companies in a wide range of industry sectors have started to undertake innovative and farreaching actions in all or some of the following areas: • Understanding and managing impacts along the full product lifecycle, from sourcing to manufacturing, marketing, distribution, product end-use and disposal; • Investing in the quality, health, safety and environmental components of the product or service; • Adapting existing brands or developing new brands that meet local needs, tastes and cultural diversity;

The IBLF’s report “The Business of Enterprise”, profiles examples from over 50 companies around the world that are developing such linkages and helping to create not only jobs and new skills, but also locallyowned, competitive enterprises that operate to sound quality standards and in some cases other international standards. 20 Companies that have played a leadership role in this area of economic empowerment and small enterprise development include Anglo American, Coca-Cola, DaimlerChrysler, Ford Motor, Unilever, Nestlé, Citigroup, Diageo, Rio Tinto, BP, and Shell. With support from the Ford Foundation, the IBLF is now working on a project to analyse and promote collective action on small enterprise development in Poland, Zambia, Vietnam and Indonesia.

Spread international business standards

6

Multinational companies can harness their global, national and local value chains to spread internationally accepted standards in areas such as: • Corporate governance and sound ethical practices, including frameworks to tackle bribery and corruption; • Quality management, operational or process management systems; • Health, safety, environment and product safety; • Labour and human rights. This can be done on an individual company basis, but also on a collective basis. The Global Compact

is one example focused on spreading corporate awareness of and commitment to international business standards in the areas of the environment, labour and human rights. A growing number of IBLF companies are also engaged in sector initiatives that aim to spread good practices across specific industry sectors. One example is the US and UK Voluntary Guidelines on Security and Human Rights, which involve US and UK mining and energy companies, as well as NGOs and the UK and US governments, expanding soon to involve other countries. Other sector initiatives include: the Fair Labour Association; the Ethical Trading Initiative; the Marine and Forest Stewardship Councils; the Sustainable Agriculture Initiative; and the Equator Principles signed by banks active in project finance. These and other initiatives illustrate how companies are starting to take a more pro-active role to spread international good practice not only along their individual value chains, but also collectively in their industry sector. The IBLF has played a role in several sector-led initiatives, offering co-ordination services and facilitating multi-stakeholder dialogue.

Support technology transfer

7

Most companies have technologies and technical skills that can be shared with and/or adapted to the needs of host countries and communities. This can include:

• Locating research and development facilities in host countries; • Linking hardware (i.e. equipment, information technology and materials) to software (i.e. local training, skills development, managerial systems); • Implementing technologies for cleaner and safer production and product distribution; • Researching, carrying out due diligence and managing the potential negative consequences of new technologies. A number of IBLF companies have established R&D facilities and major operations in developing countries. Others are transferring cleaner production technologies and processes to these countries, either directly through their own subsidiaries and supply chains or in partnership with UN bodies such as UNEP, UNIDO and UNDP.

Build physical and institutional infrastructure

8

Finally, large companies, operating either individually or on a collective basis and depending on the industry in question, can play a valuable role in contributing to a nation’s infrastructure. This can include both physical and institutional infrastructure, the lack of which are often cited as major impediments to private sector investment, national progress and development: • Physical infrastructure such as plant and machinery, roads and other transportation systems, telecommunications, water and sanitation services, domestic and industrial waste management facilities, and energy;

ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT 9

The eight core economic multipliers continued

• Institutional infrastructure such as appropriate legal, financial and accounting systems and standards, local stock exchanges and banking capacity, and local chambers of commerce, organisations of employers and other business associations and networks that help to shape market frameworks and support private enterprise development. In the case of physical infrastructure, companies in sectors such as water, electricity, waste management, telecommunications, construction and engineering, energy, mining, agri-business and manufacturing, clearly have a key role to play in providing the capital, technology and management expertise for this crucial building block of development. Logistics and transportation companies, such as DHL and UPS, also play a valuable role in increasing the physial connections between businesses and countries. This can be especially important when other forms of transport infrastructure are inadequate, or have been damaged by natural disasters or wars. There is great debate on the most appropriate roles of the public and private sector when it comes to physical infrastructure that delivers ‘public goods’ such as water, energy and housing. Water is a particularly sensitive issue. The United Nations and the World Bank argue, however, that private capital and management expertise are essential, in partnership with government and civil society, if the world is going to meet its Millennium Development target of halving, by 2015, the proportion of people without access to safe drinking water. 21

In terms of institutional infrastructure, financial and professional service firms such as KPMG, PricewaterhouseCoopers, Accenture, Deloitte Touche Tohmatsu, Marsh and McLennan, McKinsey & Company, Standard Chartered, Citigroup, Morgan Stanley and others can play a particularly important role. They can support governments in the modernization of financial institutions and improve the effectiveness and efficiency of regulatory frameworks in areas such as property rights, company and competition law, privatisation and market liberalization. In certain cases they can help to train government officials, build the capacity of government bodies and restructure financial and economic institutions. Effective institutional infrastructure is important not only at a national level, but also at an international level. One example is global electronic payments. As VISA International argues in a recent publication, “...the system of electronic payments promotes economic growth by providing fundamental benefits such as a safe, sound and predictable international payments network connecting buyers and sellers; everincreasing levels of security and consumer empowerment; greater economic transparency; increased economic stimulation; and widened participation in the banking system.”22 The development of institutional frameworks to trade and manage greenhouse gas emissions is another example of institutional innovations where the private sector is playing an important role. The Greenhouse Gas Protocol, for example, is a coalition of businesses, NGOs, and

10 ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT

government bodies, initiated by the World Resources Institute and the World Business Council for Sustainable Development. It aims to develop internationally accepted accounting and reporting standards on greenhouse gas emissions and provide practical tools to help companies manage their emissions. The Global Reporting Initiative is another innovative multi-stakeholder network, that aims to develop international reporting guidelines and indicators for sustainability reporting. Its framework is now being used formally and informally by over 150 of the world’s leading companies as they work towards greater transparency and accountability on their economic, social and environmental performance. A final example of ‘institutional infrastructure’ is the international trade system. Some major companies are taking a leadership role to support the Doha Trade Round and to advocate for increased access to developed country markets for developing countries, especially in the area of agricultural products. Senior executives in companies such as Unilever, Nestlé and Chevron Texaco, for example, have spoken out publicly on the need for a review of agricultural subsidies in Europe and the United States.

million in donations. This level of catalytic engagement is not small but is dwarfed by the beneficial impact of our day-to-day business.”10 This point is also emphasised by Unilever in their Annual Review of 2002, “We regard the very business of doing business in a responsible and sustainable way as the core of our corporate social responsibility: selling products that meet local consumers’ needs, investing in productive capacity, spreading our technical know-how, working in partnerships through the value chain and in local communities, and making environmental responsibility a central business practice.” 11 This view is shared by a group of over 40 chairmen and CEOs from 18 industry sectors and with companies headquartered in 16 countries. They stated in the Global Corporate Citizenship statement developed by the World Economic Forum in partnership with the IBLF, “First and foremost, our companies’ commitment to being global corporate citizens is about the way we run our own businesses.” 12 In the following sections we outline eight core business multipliers. If managed in a way that minimises their negative impacts and maximises their positive impacts on stakeholders, these eight core business multipliers can make an enormous contribution to building more prosperous, equitable and peaceful societies.

The eight core economic multipliers Generate investment and income

1

Companies can play a vital role to increase capital investment and inject cash into local, regional and national economies. They can do this in the following ways: • Paying wages to local employees, taxes and other royalties to host governments, timely payment to suppliers, dividends to investors, interest to banks, and grants, donations or social venture capital funds to local non-profit organisations or community groups. • Reinvesting back in the local business for future growth, research and development. • Earning foreign exchange. • Investing in local operations and transportation facilities. The cash generated by a successful business and paid out to different stakeholders can have a valuable multiplier effect, especially within local communities, but also more widely at a national or regional level.

Working with the Corporate Citizenship Company13, several companies have started to report on what they call their cash value added (CVA). These companies include SABMiller, HSBC, Diageo and Unilever. This is a useful metric that any company could adopt. In the words of Unilever, “This calculates the wealth created in monetary terms through the value that our operations add to the raw materials and services we buy in, calculated as the difference between income from customers and payments out to suppliers. The value created is then available to be distributed to employees, governments, providers of capital and local communities. Some is retained in the business or invested for future growth – that is, for the benefit of stakeholders in the future.” 14 We illustrate this metric below, drawing on the case of SABMiller, which was a pioneer in its use. The actual allocation of cash value added tends to vary depending on both the industry sector and the countries of operation, with a higher percentage tending to go to governments in most developing countries.

Source: SABMiller Corporate Accountability Report, 2003

ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT 3

fact that many developing country governments have capacity problems in implementing existing environmental, labour and human rights conventions agreed at the level of nation-states, let alone a more detailed set of standards aimed at business. A focus on building public sector capacity to implement existing international agreements would seem the best use of resources at present.

when he argued in a May 2003 Newsweek article, “Even before recent scandals, responsibilities that used to be the purview of governments – like fighting poverty, guaranteeing public health and protecting the environment – have been handed over to corporations, as if businesses were bottomless pits of money whose sole function was to provide social benefits to the world. Now may be the time to re-examine these assumptions, because the role of business has become confusing. In this era of slowing economic-growth, we must re-embrace the wealth-enhancing, job-creating role that business plays in society. And business leaders must again take the lead, offering up an assertive, positive vision of their function in the world at large.” 6

Having said this, there is clearly a need to ‘level the playing field’ and ensure that laggard companies are held to a greater level of accountability on core ethical, corporate governance, labour, environmental and human rights standards. This calls not only for capacity building, but also for increased dialogue between representative business organisations, government bodies and civil society to negotiate the most appropriate balance between regulatory frameworks, fiscal incentives, market mechanisms and voluntary business initiatives. Such dialogue should lead to interventions that influence corporate behaviour for all major companies, not only the leaders, but do so in a manner that is most likely to be efficient and effective. In some cases this may involve extra regulation, but not necessarily. Even if legislation does ensue, companies that engage in its formulation stand to benefit.

We agree in certain circumstances that there is a danger of governments and other stakeholders expecting too much of business and/or failing to reciprocate in terms of their own responsibilities and accountability. Once again, this points to a growing need for regular stakeholder dialogue, by both individual companies and industry bodies, to debate the appropriate boundaries of corporate responsibility vis a vis that of governments and civil society actors. The challenge of defining and managing such boundaries was the focus of an earlier IBLF policy briefing, Number 2, January 2003. 7

Third, there are a growing number of business leaders, academics and others who worry that too much is being expected of the private sector in a period of massive competition, economic downturn and political uncertainty. Klaus Schwab, President of the World Economic Forum, spoke for many

A fourth and final critique argues that all too often CSR is positioned as an ‘add-on’ to a company’s core business activities and economic development impact, rather than recognising these as central to what CSR is all about. As Lord Holme, former Deputy Chair of Business Action for Sustainable Development

2 ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT

and an adviser to Rio Tinto observes, “We need to get better at measuring and communicating the contribution that companies make to economic development.”8 This is a comment echoed by Bruce Klatsky, Chairman and CEO of Phillips-Van Heusen, “We need to do a better job at raising awareness of the development benefits of successful, legal, well-governed private investment.” 9 We agree that producing goods and services in a way that meets customer needs or aspirations and generates profits is a central part of a company’s social responsibility in its own right. If done in a manner that moves beyond legal compliance to reflect international norms and standards in areas such as corporate governance, human rights, labour, the environment and bribery and corruption, these core business activities and their economic multipliers can make a major difference to people’s lives and to tackling global poverty. This policy briefing focuses on that contribution. A quote from Sir PhillipWatts, Chairman of Shell, is a good place to start in emphasising the contribution of a company’s core business activities. He points out, “Our primary impact is through our business. We also participate in what might be called ‘catalytic engagement’ with others – for example through the World Business Council for Sustainable Development, the International Chamber of Commerce, the Shell Foundation and the range of community programs carried out throughout the world. To put the distinction in money terms, we are responsible for $20 billion invested in business every year on behalf of ourselves and our partners, and $140

Conclusion The eight “economic multipliers” outlined in this policy brief illustrate ways in which profitable and responsible businesses can contribute to development through the impact of their core business operations - in the workplace, in the marketplace and along the supply chain. In optimising the impacts of these economic multipliers, companies can create both shareholder value-added and societal value-added, which we define as the creation of wider economic, social and environmental value. Four key strategies that companies can employ in creating both shareholder value-added and societal value-added are: compliance; charity; control of risks, costs and liabilities; and creation of new value.23 These strategies are not mutually exclusive – in fact outstanding companies will excel in all four, viewing them as building blocks for performance excellence: • Compliance – complying with the law and industry standards is fundamental, but not sufficient in meeting or exceeding societal expectations. At best, it will protect the company’s ‘licence to operate’ and its shareholder value. • Charity – corporate philanthropy or social investment are also beneficial and can contribute societal value-added, especially to local communities, but they are unlikely to have a major impact on adding to shareholder value-added, beyond their positive impact on employee morale and motivation and some reputation and relationship benefits. Nor are they

adequate in tackling the development challenges that exist in most countries where multinational companies operate • Control – controlling or managing the company’s risks, costs, liabilities, and negative impacts is also fundamental to the protection and in some cases the enhancement of shareholder value. It is unlikely, however, to create major new value for society beyond doing ‘no harm’ to stakeholders and minimizing a company’s environmental footprint. • Create New Value – the creation of new value through innovation in products, services, processes, markets, alliances and business models has the greatest potential for delivering benefits to both shareholders and society. It moves companies from a mindset of ‘do no harm’ to ‘do positive good’ and from a framework of corporate social responsibility to corporate social opportunity.

In conclusion, the private sector can make a vital contribution to development and many companies are already doing so. Through responsibly managing their core business activities and harnessing their core business competencies, these companies are moving beyond compliance, risk management and philanthropy to deliver innovative, competitive and profitable solutions to development. Governments, the media, academia and civil society actors need to offer more recognition and support for such companies. At the same time, business leaders can play a crucial role themselves. They can act as ambassadors for values-driven leadership by speaking out on the role of business in addressing international development and governance issues. They can also mobilise their boards of directors, their managers and the young people who are the next generation of business leaders to promote responsible business.

Another useful analysis of how companies are managing their economic impact to benefit society has recently been produced by AccountAbility, Business for Social Responsibility and Brody Weiser Burns.24 The World Resources Institute Sustainable Enterprises programme and the WBCSD’s Sustainable Livelihoods initiative also offer useful models on the economic development role of the private sector.

ECONOMIC MULTIPLIERS REVISITING THE CORE RESPONSIBILITY AND CONTRIBUTION OF BUSINESS TO DEVELOPMENT 11

IBLF Policy Paper 2003, Number 4

ECONOMIC MULTIPLIERS

Footnotes 1. Nelson, J. Business as Partners in Development: Building wealth for countries, companies and communities, PWBLF in collaboration with the World Bank and UNDP, 1996. This model of core business multipliers was developed further in Nelson, J. Building Competitiveness and Communities: How world class companies are creating shareholder value and societal value, PWBLF in collaboration with the World Bank and UNDP, 1998. 2. Nike v Kasky - a case dismissed by the U.S. Supreme Court in July 2003 on technical grounds which focused on the freedom of speech of corporations when talking about public policy issues and their social and environmental performance. 3 For one useful critique see Misguided virtue: False notions of Corporate Social Responsibility, by David Henderson. Institute of Economic Affairs, London, 2001. 4. Shell Report Profits or Principles: Does there have to be a choice?,1998 5. Citizens Charter to the UN, in response to the launch of the Global Compact, CorpWatch website. 6. Schwab, K. Get Back to Business. Article in Newsweek International, May 5 2003. 7. Davies, R and Nelson, J. The Buck Stops Where? Managing the Boundaries of Business Engagement in Global development Challenges. IBLF Policy Paper 2, January 2003. 8. Comments made by Lord Holme at meeting hosted by IBLF and UNDP to discuss the contribution of business to meeting the Millennium Development Goals, April 5th 2003. 9. Comments made by Bruce Klatsky at meeting hosted by IBLF and World Bank to discuss the boundaries of business in developing countries, January 22nd 2003. 10. Comments made by Phil Watts, Chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group, in a speech at the Royal Institute of International Affairs, London, July 5 2002. 11. Unilever Annual Review, 2003. 12. World Economic Forum Global Corporate Citizenship Initiative (www.weforum.org/) 13. This is a recognised accounting technique that has been promoted by

Revisiting the core responsibility and contribution of business to development

the Corporate Citizenship Company (www.corporatecitizenship.com) 14. Listening, learning, making progress. Unilever 2002 Social Review of 2001 data.

by Jane Nelson, July 2003

15. Commencement address delivered by Lord Browne to Colorado School of Mines, May 9th 2003. 16. Nelson, J and Moberg, J. Building Bridges: Opportunities and challenges for responsible private sector involvement in Iraq?s reconstruction. IBLF Policy Paper 3, June 2003. 17. Bughin, Jacques and Copeland, Thomas E. The virtuous cycle of shareholder value creation. The McKinsey Quarterly, 1997 18. Pralahad, C.K. and Hart, Stuart, L. The Fortune at the Bottom of the Pyramid. Strategy+Business, Issue 26, Reprint No. 02106 19. Logan, D The Business Response to HIV/Aids: Innovation and Partnership Global Business Council on HIV/Aids and IBLF, 1997 and Daley, K, The Business Response to HIV/Aids: Impact and lessons learned UNAIDS, Global Business Council on HIV/Aids and IBLF, 2000 20. Brew, P and House, F. The Business of Enterprise: Meeting the challenge of economic development through business and community partnerships. IBLF, 2001.

The International Business Leaders Forum is a not for profit organisation, founded in 1990 by HRH The Prince of Wales and a group of international CEOs, in response to the emerging social challenges of economic growth and change in the global economy. The IBLF’s mission is to promote international leadership in responsible business practices, to benefit business and society. It works strategically with business, civil society and the public sector in transition and emerging economies in order to achieve socially, economically and environmentally sustained development. Acknowledgements This paper draws on ten years’ of the IBLF’s work. Thanks to Nick Claridge and Joe Phelan for their support in designing and producing this document.

21. Nelson, J and Prescott, D. Business and the Millennium Development Goals: A framework for Action. IBLF in collaboration with UNDP, 2003. 22. The Virtuous Circle: Electronic payments and economic growth. A white paper prepared by VISA International and Global Insight, 2003. 23. This draws from a framework developed in Profits with Principals: Seven principles for building trust and competitiveness, by Ira Jackson and Jane Nelson, Doubleday (forthcoming, 2004). Another forthcoming book written by IBLF staff is Corporate Social Opportunity, by Adrian Hodges and David Grayson, Greenleaf (forthcoming, 2004). 24. Business and economic development. AccountAbility, Business for Social Responsibility and Brody, Weiser Burns, June 2003

For more information, please consult IBLF’s website: www.iblf.org IBLF, 15 – 16 Cornwall Terrace, Regent’s Park, London, NW1 4QP, UK Tel: + 44 (0)207 467 3667 Fax: +44 (0)207 467 3610 E-mail: [email protected]

What can the private sector really contribute to development? Do companies help to raise standards in developing countries? From the outset of the IBLF’s existence in 1990, we have focused our efforts on answering these and other questions by addressing the core business contribution that companies make to development. While recognising the important roles of philanthropy and compliance, we have argued that the greatest contribution that companies can make to society, especially in developing countries, is through responsible, efficient and profitable mainstream investment that produces a variety of socio-economic multipliers. In 1996, working with the World Bank and with the United Nations Development Programme, we identified eight of these ‘core business multipliers’1. They have all too often been overlooked and undervalued in the corporate social responsibility debate. As the CSR debate gains maturity we feel it is useful to revisit and remind ourselves of the contribution that these multipliers can make to spreading economic opportunity and supporting sustainable development. This is particularly important given the growing emphasis on the costs and benefits of globalisation and heightened awareness on the need for local solutions. The eight core business multipliers: 1. Generate investment and income 2. Produce safe products and services 3. Create jobs 4. Invest in human capital 5. Establish local business linkages 6. Spread international business standards 7. Support technology transfer 8. Build physical and institutional infrastructure

© International Business Leaders Forum, July 2003

During the past decade the field of corporate social responsibility (CSR) has moved from the margins of the corporate agenda to the mainstream. For most leading companies it has advanced beyond legal compliance and beyond philanthropy to address core business issues such as risk management, innovation and value creation. It has created a global network of practitioners, consultants and academics and resulted in new market mechanisms, regulations and voluntary initiatives, plus a variety of management tools and guidelines. Issues related to corporate social responsibility have become familiar subjects in the international business media and conference circuit, and have even been the subject of a recent U.S. Supreme Court Case.2 At the same time, CSR has become the focus of increasing criticism from some very different perspectives. Four of the most common critiques are as follows: First, there are those who continue to argue that the sole corporate responsibility of business is to make profits and obey the law, within a minimalist legal framework. They argue that adhering to the principles of CSR raises costs and prices, increases regulations and may actually reduce society’s welfare rather then enhance it.3 We would agree that profitability and basic legal compliance are crucial foundations for responsible business. They are not sufficient, however, in today’s world where new

societal expectations are creating reputation and litigation risks for companies that fail to demonstrate and account for their performance against responsible business principles and values. As Sir Mark Moody-Stuart, chairman of Anglo American and former Chairman of Shell has observed, “Without profits, no private company can sustain principles. Without principles, no company deserves profits.” 4 Second, there are those who argue the case for comprehensive global regulation of business behaviour. They base this on the rationale that many companies cannot be trusted to behave responsibly on a voluntary basis, regardless of the values and principles they profess to have. A group of over 80 NGOs and academics, for example, has called on the UN for such regulation. They argue that, “Multinational corporations are too important for their conduct to be left to voluntary and self-generated standards. A legal framework, including monitoring, must be developed to govern their behaviour on the world stage.”5 We would argue that the advocates of such an approach have given insufficient thought to the practical challenges of implementing, monitoring and sanctioning a global regulatory framework that aims to cover all CSR-related issues (economic, social, environmental and ethical) in all countries, all industry sectors and all major companies. This is in addition to the