Both the prevalence of digital communication and the globalization of business supply chains have dramatically changed the way business is conducted and the way information about corporate practices is disseminated. Managing the social, environmental and economic impacts of supply chains has become essential for international business. Not only can stakeholder opposition lead to project delays, additional costs and liabilities, it can also render irreparable damage to a corporate reputation. More recently, with increasing shareholder social activism, pressure to change company practices is also coming from within organizations. As the United Nations Global Compact reports, “supply chain sustainability is increasingly recognized as a key component of corporate responsibility.”
Corporate Social Responsibility (CSR) is the integration of social and environmental factors into corporate decision-making. CSR is commonly viewed in terms of ‘stakeholder relations’, especially in industries like extraction or water use that have long had to consider their impact on surrounding communities. Stakeholders are persons or groups who are directly or indirectly affected by a project, as well as those who may have interests in a project and/or the ability to influence its outcome, either positively or negatively. Today, CSR has expanded beyond directly-impacted communities to include a more global view of the environment and community.
The importance of CSR as part of a holistic risk assessment strategy is gain acceptance but what is often overlooked is the value-creating potential of a CSR strategy. By designing comprehensive local and global stakeholder engagement and sustainability strategies, companies have the opportunity to create a broader, more inclusive, and continuous feedback process between a range of constituents. This approach not only affects the life of a specific project, but can also offer valuable insight for future operations and business development.
A new type of risk
Risk is understood by most boards and management in the context of a company’s threats, vulnerabilities, controls and counter measures. As Harvard professor and United Nations Secretary General’s Special Representative in Business and Human Rights, John Ruggie, explains in his report CSR as Risk Management “risk arises when a vulnerability exists within an organization’s operating system in the absence of effective controls and countermeasures.”
Traditional risks are generally classified in terms of political, economic, and technological risk.While operations abroad and even in the United States still pose traditional business risks – political regulations or regional economic instability for example – Professor Ruggie raises discussion of a new type of risk called “social risks.”
Ruggie defines social risks as the levers and pressure points imposed by civil society and stakeholders on business and explains that because globalization creates a web of complexity, interdependence, and constant interactions among various stakeholders, businesses are increasingly vulnerable to key players in the dynamic global business system. Ironically, Professor Ruggie points out, “a social risk may arise from what appears to be a sound business decision,” citing examples like labor violations stemming from the business imperative to drive down prices and boost profit margins. Once a risk comes to fruition, the company may then be forced to expend significant resources changing its policies or approaches in the marketplace.
In consultations with international extractive companies, Professor Ruggie explained that “costly project delays often were the result of ‘stakeholder-related risks’” noting that one company experienced a $6.5 billion “value erosion” as the result of mismanaged stakeholder relations. The risks are often even greater for companies that claim to have embraced a CSR strategy, and then experience a major crisis. One only need to look at BP’s stock prices, which have plummeted from a high of $80 in October 2008 to $27 shortly after the Gulf of Mexico oil spill, to their current price of $46 over a year later.
Another interesting, recent response to social risks is the growth of shareholder resolutions in the annual proxy statement. During the 2010 proxy season, for example, shareholders of companies such as Caterpillar, Hewlett-Packard, Motorola and KBR asked for the adoption of human rights policies and assessment mechanisms. Specifically, the resolutions filed with Motorola and Hewlett-Packard urged that the companies develop policies to provide assurance that their, ‘products and services are not used in human rights violations.’ It is notable that these resolutions came in the wake of publicity over the use of conflict minerals in consumer electronics. While these shareholder resolutions are themselves not specifically social risks, they certainly disturb many of the ‘business as usual’ assumptions that traditionally dominate corporate decision-making.
From risk to value creation
Professor Ruggie describes CSR as ‘strategic intelligence,’ emphasizing the importance of social risk management as a value creation opportunity for business. Integrating stakeholders at all levels into decision-making (rather than informing them after substantive decisions have been made) expands the company frame of reference to the issues, problems and opportunities that involve the whole global system or network. “By integrating the business sensing, learning, and innovations gained from CSR programs, companies can better manage their risks and subsequently their economic, social and environmental impacts in a manner that is roughly analogous to what they learn from their customers, a well established form of business intelligence gathering.”
Additionally, as noted by the International Finance Corporation, choosing not to be proactive in establishing relationships with third parties, such as local government officials or NGOs, can quickly become problematic. Once a problem arises, and the multinational realizes the need to elicit support, or to find an intermediary, and perceived reputational risks can hinder a third party alliance. Rather, engaging with stakeholders from the start, as part of a business’ core business strategy “enables a proactive cultivation of relationships that can serve as ‘capital’ during challenging times.”
A Case Study in Stakeholder Value Creation
One company, Philippines-based Manila Water Company (MWC), provides an excellent example of the importance of proactive and strategic relationships with shareholders. As a water company with a mission to provide clean, safe water and sewage services to approximately half of Manila’s population, MWC aimed to have a proactive and open relationship with a number of its stakeholders, including customers, and local NGOs.
Manila is a city that has been historically plagued by unequal access to clean water. Until 1997, 76 percent of households in the eastern zone of Manila, home to 5 million people, did not have access to 24-hour water. Additionally, the rate of water loss was the highest among major cities in Asia, with two-thirds of the water produced lost to leaks and illegal tapping, and only 26 percent of 325,000 households in the metropolitan area had access to clean and affordable piped-in water. Working with the IFC, the Philippines government privatized the state owned utility by granting a concession contract to MWC.
The context of the story behind MWC’s acquisition and mission to revamp the Manila water system is particularly important in understanding its engagement policy. After the IFC directed concession from the government operator to Manila Water, the company launched a “Walk the Line” program. Once a month, all company staff – from managers to district level representatives – visited their customers, including residents of informal settlements, to consult with them on water access in their community. By adopting a grassroots approach to serving low-income consumers, the company was able to integrate key stakeholders into its operations as a source of intelligence and strategic business planning.
As a result of this engagement and other initiatives, Manila Water significantly improved its service delivery. Between 2004 and 2006, the percentage of households having a 24-hour water supply jumped from 26% to 95%. At the same time, water losses from the system were reduced from 63% to 35.5%. From 325,000 households served at the start of 2004, there were more than 1,000,000 in 2006, including over 848,000 urban poor. By purposefully integrating a permanent stakeholder consultation function into its business development, MWC has not only transformed their service delivery but been established as a global leader in sustainable development and community projects.
The story of the Manila Water Company illustrates the idea that CSR evolving toward broader business imperatives and strategic management rather than philanthropic giving or cause related branding. Consumer and shareholder activism, paired with technology’s unique ability to coalesce remote stakeholders together and communicate instantaneously, has forever changed the world of business. Whether companies choose to perceive various actors along their supply chains as risks or opportunities is indicative of the fact that businesses can no longer ignore them – it is how they decide to integrate these disparate voices and communities that will determine their competitive advantage in the future.
In an increasingly connected and complex world, social and environmental risk management will only grow in importance. Companies that are able to sense and understand these risks will not only be able to better preemptively avoid the costs of misdeeds, but also create better network-based models of information sharing for business innovation.
Derek Linsell is President and CEO of Apricot Consulting. Nicole Skibola is Social Innovation Strategist at Apricot Consulting.