Sustainable Supply Chain Management Practices: What In The World Is Going On?
Larry Berglund, CPP, MBA
Executive Summary
There has been resurgence in corporate social responsibility (CSR) for a wide variety of reasons. These range from strategic differentiation by adopting “do good practices” to preserving the eco-system in remote geographical areas to introducing environmentally friendly alternative products to the training of indigenous people in the supply chain.
Much of the literature on the subject maintains the view of the advocates who see corporate social responsibility as the mantra for business in this millennium. The arguments against business taking on social responsibility as a part of their corporate agenda is lesser publicized or even referenced. Public interest, non-governmental organizations (NGOs) are active and vocal in their charges against “corporations taking over the world.” There are examples of good science and junk science to influence the perceptions of non-believers that CSR is a must.
Many high profile organizations such as Hewlett Packard, Shell, Dell, Placer Dome, and BHP Billiton have included CSR statements within their annual reports or have adopted CSR or sustainability policies. Publicly traded, multinational corporations (MNCs) are often the target of the NGOs for not acting fast enough or doing enough, according to the NGOs. MNCs are easy targets to identify, recognizable through the brands or products they represent or their corporate affiliations.
Our collective history has included slave labour, forced labour, child labour, and other exploitive business practices in all countries or markets in the world in the name of profits or access to resources. Retailers such as Nike, The GAP, and Mattel have taken positions and introduced policies designed to mitigate or prevent these practices. For most retailers, they went from defence of their status quo industry practices to developing progressive policies across their supply chain.
There is no industry or sector which is not affected by the issues which relate to CSR and sustainability. The purpose of this paper is to provide a background on how the market has evolved and to put forth a balance of the issues which surround the controversial and complex subject of corporate social responsibility or its corollary, sustainability. There is also a need to present pragmatic ideas which can affect social changes through the actions of supply chain professionals or add to the awareness of how their decisions have a ripple effect across a culture, community, or country.
Table of Contents
-Background
-The Role of Business
-What is Sustainability?
-Principles and Standards of CSR and Sustainability
-Affect of Economics on the Development of CSR and Sustainability
-Reasons Against Sustainability Strategies
-Reasons For Sustainability Strategies
-Supply Chain Management Practices
-Summary
Background
It’s a good idea to assess where we are and where we are going, by understanding where we were.
As described by Thomas Palley in his book, Plenty of Nothing, the period from 1945 – 1973 was a steady run of economic prosperity in the American economy, which certainly affected the economic development of the Canadian market. Post World War II was the Golden Age. This was a world devoid of personal computers, cellular telephones, the Internet, containerized goods, lean thinking, or 24 hour newscasts. Business was largely driven by growing market share and driving profits through the ability to capitalize on the unfettered access to global material resources and labour.
During this period, the Keynesian economic theory led to consumer credit, higher disposable incomes, along with increased borrowing to support increased demand and fuelled the market growth. One of the key factors to arrest the Golden Age was the 1973 oil price stop sign. Subsequently, inflation appeared, soon followed by a period of recession in the early 80s. For one of the first times in decades, there was a tightening of wages to stem the loss of profits and social dissention was created as individuals sought their share of the redistribution of income in relation to executive pay and shareholder returns.
As the oil crisis challenged the accepted business economic models, there was a growing concern for the environment by various NGOs and consumer groups. North American consumer appetites for automobiles began to be satiated by cheaper imported vehicles. Not only did the consumer save on financing, imports got more miles per gallon which appealed to environmentally conscious customers, and opened the door for increased entry of commercial and industrial goods from foreign manufacturers into a relatively complacent and vulnerable market.
This had a significant effect on the previously stable employment record enjoyed in Canada and the United States. We witnessed the decline of domestic suppliers as buyers started looking at foreign sources of industrial goods in such commodities as steel, bearings, electronics and consumer goods resulting in a rise in unemployment. This began the transition in North America to the service-based economy from one of manufacturing. In 1994, as a response to creating a more competitive market, the North America Free Trade Agreement was initiated between Mexico, Canada and the U.S. This provided access to lower cost Mexican labour for Canadian and U.S. manufacturers as they tried to compete with lower cost regions across the Pacific Rim.
The Maquiladora zone in Northern Mexico became the economic benefactor with a rush by U.S. and Canadian manufacturers relocating production, packaging, and assembly operations to reduce costs.
The environmental NGOs appeared in the late 60s and established themselves as a formidable presence over the next decade, such as the Greenpeace organization. However, consumers of goods for personal and commercial use, were largely unaware of any significant social problems related to the production of goods or access to mineral resources within the global community. This attitude and awareness is slowly changing in European and North American communities by corporations and their customers. Traditionally, commercial and industrial buyers are primarily rewarded through their ability to achieve cost reductions – which is the way their performance is measured.
In the mid-90s the revised ISO 9000 standards were gaining greater acceptance as a means of providing a benchmark for international suppliers and customers to agree on quality definitions. The ISO 14001 environmental standards were introduced in 1996 to further raise the bar and ensure minimum protection of natural resources by manufacturers on a global scale.
Today, in 2005, we are immersed in a market where Brazil, Russia, India, and China are positioning themselves to be leading global suppliers with a commanding economic presence. They are taking the place of the Asian tigers – Hong Kong, Korea, Malaysia, and Indonesia, which enjoyed rapid growth in the early 90s. In 1997 the Thai government could no longer peg the baht to the U.S. dollar and this triggered a free fall in the neighbouring country currencies. This regional deflation allowed for a price deflation with goods imported to North America and spurred on the spending for low cost goods to meet shareholder expectations and the consumers delight in cheaper products.
The acknowledgment of the influence on social values in relation to the provision and consumption of goods and services was taking place.
The Role of Business
In Mintzberg’s co-authored paper, Beyond Selfishness, he talks about the fabrication of a corporation’s raison d’être. What once started out as a purpose to serve society through a revocable charter has now evolved into an entity which only serves its master – the shareholders.
The defining moment came when the transition from social responsibility to shareholder responsibility occurred in September 1997. It was a result of the pronouncement to that effect by the Business Roundtable, an American executive group. They stated, “The notion that the board must somehow balance the interests of stockholders against the interests of other stakeholders fundamentally misconstrues the role of directors. It is, moreover, an unworkable notion because it would leave the board with no criterion for resolving conflicts between interest of stockholders and of other stakeholders or among different groups of stakeholders.”
This has led to a myopic focus on quarterly returns which are justified by cost savings even if long-term benefits are not attainable. There are incidents of booking sales for goods which have not been delivered. The worst cases lead to illegal practices for the sake of satisfying the shareholders. Even though the shareholder may be a day trader with no inherent interest in the corporation or its employees other than the short-term gratification of the instant wealth they can provide. The CEO must deliver returns for the impersonal investor community which may be realized through sacrifices in quality, safety or concern as to how those products were produced. The epitome of this in a CEO could be seen in the character of Al “Chainsaw” Dunlap. He held an infamous role as the leader of Scott Paper through to his unceremonious expulsion from Sunbeam for providing shareholders with returns through an unsustainable business model.
Of even greater notoriety were the actions by former corporate shareholder darlings in the likes of Enron’s Fastow, WorldCom’s Ebbers, and Tyco’s Kozlowski. Even as these corporate fiefdoms were being plundered by their senior executives, in Canada, the Gomery inquiry revealed that Groupaction Marketing Inc. was involved in fraud related to government contracts. The fact that the public is chagrined by corporate behaviour is well founded, given these examples. The Sarbanes-Oxley Act will address corporate governance issues to a certain degree – to protect the stockholders.
Despite these problems, businesses are the engine of a capitalist market. Business has a strong influence on the cost and standards of living. The role of government is to provide the checks and balances that society wants to see in corporate behaviour. Businesses are amoral. Business executives have morals. Executives often obey based on the cost of compliance: cheaper to obey or disobey – and what is the probability of being detected? There is a shift in the expectations that society needs businesses to be successful and make profits BUT they also want to know how those same profits are made.
What is Sustainability?
The widely accepted definition comes from the 1987 Bruntland Commission study which states: “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.” We can also credit the Bruntland Commission for defining sustainable development which states – “The management of the human use of the biosphere so that it may yield the greatest sustainable benefit to present generations while maintaining the potential to meet the needs and aspirations of future generations.” This early research can be seen as the catalyst for the increased interest in corporate social responsibility.
The definition for corporate social responsibility goes further into the topic. The Centre for Corporate Social Responsibility and Sustainability at the University of Zurich, December 2004, addressed CSR as “A company’s commitment to explore and seize opportunities to enhance its overall contribution to society while it pursues its core objective of value maximization.” Added to this is the investment community perspective through the Dow Jones Sustainability Index, 2003, which stated: “A business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic and social developments.”
The World Business Council for Sustainable Development offers the definition of a “business commitment to contribute to sustainable economic development, working with employees, their families, the local community, and society at large to improve their quality of life.”
The resonating theme in these definitions is the attention to social concerns or values along with the recognition that profits are necessary and enable our advancement. An equation to express this model could be: Economic return + Environmental return + Socially acceptable benefits = Sustainability. The values can be variable but where there is a zero or less for any of the variables or outcomes, this would indicate an unsustainable business case.
In their new book co-authored by Philip Kotler and Nancy Lee, Corporate Social Responsibility, written from a marketing perspective, they have defined CSR as “Corporate social responsibility is a commitment to improve community well-being through discretionary business practices and contributions of corporate resources.” They see CSR as an optional strategy for corporations to profit by strategically managing CSR and going beyond the cheque writing exercises associated with the narrower scope of corporate philanthropy. They endorse an approach of cause-related marketing and recommend only applying this where a business has operations.
They reference an example by American Express. Not to take the action by American Express out of context, for their Campaign to Reopen the Statue of Liberty, but it was certainly self-serving to promote their contribution of one cent for every purchase made on an American Express card up to $2.5 Million over a two month year-end period in 2003, to refurbishing the ultimate American icon and claiming this was a significant element of their CSR. This American Express sponsorship program fits the definition put forth by Kotler and Lee.
In 1991, the World Bank economist Herman Daly contributed the following definition for a sustainable society. “A sustainable society needs to meet three conditions: its rate of use of renewable resources should not exceed their rates of regeneration; its rate of use of non-renewable resources should not exceed the rate at which sustainable renewable substitutes are developed; and its rate of pollution emissions should not exceed the assimilative capacity of the environment.”
Principles and Standards of CSR and Sustainability
1. The Ceres Principles
The Ceres Principles are widely referenced as guiding principles in many articles and are used by corporations such as Interface.
The ten Ceres Principles are:
| Protection of the biosphereSustainable use of natural resourcesReduction and disposal of wastes
Energy conservation
Risk reduction |
Safe products and servicesEnvironmental restorationInforming the public
Management commitment
Audits and reports |
2. The Hanover Principles
The nine Hanover Principles or maxims were developed for the EXPO 2000 World’s Fair in Hanover, Germany. They are aimed at urban planners, designers and architects to consider in the choice of materials, functionality, and human experience in an ecological system. They are:
| Insist on rights of humanity and nature to co-existRecognize interdependence between humans and natureRespect relationships between spirit and matter
Accept responsibility for the consequences of design
Create safe objects of long-term value |
Eliminate the concept of wasteRely on natural energy flowsUnderstand the limitations of design
Seek constant improvement by the sharing of knowledge |
3. The Equator Principles
The Equator Principles are used by the international investment community sponsored by the World Bank. The principles are structured to screen projects for inclusivity of environmental, social and economic risks, generally within emerging economies. Among the organizations which have adopted the Equator Principles are: Bank of America, CIBC, Credit Suisse Group, HSBC, ING Group, JPMorgan Chase, Manulife, Royal Bank of Canada, and Scotia Bank.
The Equator Principles address:
a) assessment of the baseline environmental and social conditions
b) requirements under host country laws and regulations, applicable international treaties and agreements
c) sustainable development and use of renewable natural resources
d) protection of human health, cultural properties, and biodiversity, including endangered species and sensitive ecosystems
e) use of dangerous substances
f) major hazards
g) occupational health and safety
h) fire prevention and life safety
i) socioeconomic impacts
j) land acquisition and land use
k) involuntary resettlement
l) impacts on indigenous peoples and communities
m) cumulative impacts of existing projects, the proposed project, and anticipated future projects
n) participation of affected parties in the design, review and implementation of the project
o) consideration of feasible environmentally and socially preferable alternatives
p) efficient production, delivery and use of energy
q) pollution prevention and waste minimization, pollution controls (liquid effluents and air emissions) and solid and chemical waste management
4. The Global Sullivan Principles
The Global Sullivan Principles were founded by Reverend Leon H. Sullivan and are focused on economic, social, and political justice of corporations wherever they operate. The Sullivan Principles are endorsed by ~200 corporations internationally. Among their list of endorsers are British Airways, Chevron Texaco, Coca Cola, General Motors Corporation, HSBC Holdings plc, Kentucky Fried Chicken Corp, PepsiCo Beverages and Foods, Procter & Gamble Company, Rio Tinto plc, Sodexho, Inc., and Tyco International, Ltd. A synopsis of the eight principles is:
| Express support for universal human rightsPromote equal opportunity for employees at all levels of a companyRespect for freedom of association by employees
Compensate employees to meet at least their basic needs |
Provide a safe and healthy workplacePromote fair competition and not offer, pay or accept bribesWork with governments and communities to improve the quality of life in those communities
Promote the application of these principles to business partners |
There are many other generally referenced principles or programs being promoted such as The Natural Step for Communities. They all tend to follow variations of the above mentioned principles.
Given the corporate names which subscribe to the aforementioned principles, corporate behaviour or individual executive ethics does not meet the expectations of the said principles, based on the publicly reported issues in recent years.
5. Leadership in Energy and Environmental Design (LEED)
The purpose of LEED was to define “green building” by establishing a common standard of measurement; promote integrated, whole-building design practices; recognize environmental leadership in the building industry; stimulate green competition;
raise consumer awareness of green building benefits; transform the building market. This initiative is aimed at preventing problems at the drawing board stage. LEED programs are involved with retro-fitting building to be more sustainable but the retro-fit is more costly than doing it right at the outset of construction by design and material use.
LEED materials typically have zero emissions, are deconstructable, renewable, recyclable, contain recycled content, and can be reused. For supply chain professionals within the construction industry, these guidelines are the most influential and cost sensitive. Despite potentially higher construction costs, there are many benefits for sustainable development – human health, minimize environmental impact, reduce energy consumption.
Green building designs have been incorporated in building designs in Canada, the U.S., Europe, and Malaysia. Benefits range from human comfort to ecosystem compatibility.
Mountain Equipment Co-op’s (MEC) new Ottawa store may well be the most environmentally friendly retail building in Canada. By recycling and using highly efficient building materials – such as straw bales – the Ottawa location will consume about half the energy than a conventional store of comparable size. Although the cost was about 10 percent more than that of traditional construction, MEC expects to recover the premium it paid in 10 to 12 years through energy savings.
MEC’s Ottawa outlet is the first retail store in Canada that complies with HYPERLINK “http://www.buildingsgroup.nrcan.gc.ca/” \t “_blank” Canada’s C-2000 Green Building Standard. That means the new store was designed and built to have the least possible impact on the environment. For example, of the original, 40-year-old building that was renovated to house the new store, fully 75 percent (by weight) of the original materials were retained. Timber was reclaimed from the St. Lawrence River and used for new construction in the building – and about 80 percent of all the materials used in construction were obtained within a 500-km radius of the site, to minimize the upstream environmental impacts from transportation.
Overall, more than 55 percent of the materials (by weight) in the new building were recycled, cleaned up and reused – including steel beams, cellulose insulation, rock wool from recycled material, wood from other dismantled buildings and bricks from the old building on the site.
6. International Labour Organization (ILO)
The International Labour Organization, founded in 1919, is the UN specialized agency which promotes social justice and internationally recognized human and labour rights. Most of the leading global companies that have endorsed CSR or sustainability have included the four basic areas of the 1998 ILO labour Declaration which are:
Freedom of association and the right to collective bargaining
The elimination of forced and compulsory labour
The abolition of child labour
The elimination of discrimination in the workplace
7. Ethical Purchasing Policies (EPPs) and Supplier Codes of Conduct
In the past few years there has been increased pressure from NGOs in Canada, Europe and the U.S. to require private and public sector organizations to adopt EPPs along with supplier codes of conduct. These policies are generally directed at the elimination of sweat shops related to the garment and textiles industry.
Sweat shop awareness gained notoriety in the mid-90s when high profile branding companies such as the GAP and Kathie Lee Gifford’s clothing line, were revealed to be sourcing their production in conditions which contravened ILO conventions and other human rights issues. Further revelations were found with Disney and Mattel, to be followed by investigations in the supply chains of Nike, Adidas, Reebok, Umbro, Mire, and Brine.
The City of Vancouver, B.C. and Los Angeles, California were among the first North American municipalities to adopt EPPs. The Canadian university book stores have been active in ensuring their branded clothing and novelty items are meeting ILO standards and their respective supplier codes of conduct. This is being coordinated with limited success through the Canadian Association of University Business Officers (CAUBO). The issue of monitoring supplier performance for compliance is a key part of these programs.
Most of the brand management companies adopted various forms of EPPs along with supplier codes of conduct. Supplier codes of conduct generally reference the ILO standards at a minimum, along with other corporate values. By way of example, in 1997 Mattel developed a set of Global Manufacturing Principles which sets the human rights, health and safety, environmental, cultural and ethnic, and philosophical standards which must be complied to by suppliers, sub-contractors and licensees and others that do business with Mattel.
Mattel have the independent monitoring organization, International Center for Corporate Accountability, report out on their progress regularly. Monitoring production conditions across the supply chain is a very challenging commitment, given the distance and diversity of issues to be faced. Case in point, as reported by Elisabeth Malkin in the New York Times International, June 12, 2005:
Mattel’s Barbie Label Licensee, Rubies Costume Company, based in Richmond Hill, Queens, operating in Tepeji del Rio, near Mexico City. Rubies is one of the largest costume companies in the world.
“Child labour is a zero tolerance issue,” according to Mattel. In spite of Mattel’s eight year’s of experience there were allegations of verbal abuse, forced over time, making workers buy special tool belts, child labour, and restricting freedom of association. Special tool belts cost $45 – workers make $5 day.
China is being used as a pretext to diminish labour conditions in order to keep the workers reporting to work (and maintain their productivity).
Mexican law allows 14-15 year olds to work a reduced day. Mattel requires employees to be at least 16 years old. Rubies acknowledged an audit by Mattel turned up one 15 year old.
Rubies, as a result of the Mattel audit, have promised to hire employees older than 16 years old and to correctly pay over time.
One employee claims the Rubies’ plant manager altered her birth certificate and hired her at 14 years of age.
Once these allegations are reported it is difficult for organizations to respond effectively without inviting further criticism. To Mattel’s credit, they would appear to be doing as much as possible to stem problems within their supply chain to meet their corporate commitments, yet still are facing the issues with a major supplier for Barbie® attire. This example serves as a means of showing the degree of constant vigilance brand managers must go to ensure a sweat free, in this instance, supply chain.
The NGOs monitoring the garment and textile industry include the Maquiladora Solidarity Network (MSN). MSN are supported by international union and human rights organizations, including Oxfam. MSN is a labour advocacy group focused on workers rights in Mexico, Central America and Asia and works in Canada with other NGOs to promote EPPs.
There are many not-for-profit garment industry third party, auditing organizations including SA8000, the FLA, the WRC and Verité. These four organizations are widely used and referenced.
8. Reporting
There are also globally recognized guidelines or principles for reporting of corporate activities which is inclusive of economic and social indicators and sustainable practices. The Global Reporting Initiative (GRI) is widely disseminated and referenced for their comprehensive reporting requirements. The GRI reporting elements are analogous to the ISO compliance or the Malcolm Baldrige quality program requirements. A need for a standard was identified in order to benchmark progress for organizations and stakeholders which advocated sustainability. GRI published their guide in 2000.
The (11) reporting principles are:
| TransparencyInclusivenessAuditability
Completeness
Relevance
Sustainability context |
AccuracyNeutralityComparability
Clarity
Timeliness |
Affect of Economics on the Development of CSR and Sustainability
The context for business in a capitalist system connects two dynamic factors: the economy within which the all competitors must play; and governmental economic policies.
Capitalism provides the best and worst means of distribution of wealth. The motivation for profits requires a constant search for new products and increased efficiency to lower production costs. This results in a shorter shelf life for best practices and products. Schumpeter referred to this as “creative destruction.” The result of this is the different groups within society fighting for their share of the income – the fight between wages and wealth. Palley sees this conflict as the catalyst which determines the ability of the consumer to increase the demand which must be met by industry through the consumption of goods. There is continuum of insatiable consumers for new products, which encourages innovative manufacturers, while concurrently reducing production costs through technical advancement or locating plants where labour costs are lower without being offset by increased transportation rates.
Successful periods of Keynesian theory of demand management were identified as having the equilibrium of government monetary polices (interest rates) and fiscal policies (spending/taxes). However, the Keynesian theory also recognizes the propensity of periods of deficiency in demand for goods and services – recessions, depressions and/or significant unemployment. In spite of this, arguably capitalism is the most productive form of a social system. Capitalist economics generate the largest amount of goods available and a higher standard of living than other economic models.
Palley has commented that from early 1970s onward there has been a series of economic peaks and valleys, followed by increased government debt, which indicates that the pure demand management theory has not been effective. He sees several cracks in the Keynesian model’s ability to sustain values without unintended consequences as follows:
1. There is an inequity of mass workers wages in relation to those of the wealth of a few capitalists during the same period – an exploitation of labour with a weakening economic well-being.
2. A myth of the capitalist market is that it is a free market. There is an excess of government regulations on property rights, individual and contractual obligations, corporate and personal incomes taxes, to name a few. Business interest groups lobby for changes to government or industry practices to maximize profits.
3. Investors want stock values to increase even if it means reducing wages of the workers – as long as it isn’t my wage! However, if we all adopt this attitude, all of our wages decrease greater than the rate of increased share value. The largest shareholders win.
4. Most individual employees are working longer, harder to be number one; less family time, less community involvement, even personal health may be sacrificed to achieve the financial dream. As observed by Jensen and Meckling, “Like it or not, individuals are willing to sacrifice a little of almost anything we care to name, even reputation or morality, for a sufficiently large quantity of other desired things…”
5. A deconstruction of retailing from smaller, entrepreneurial motivation to Big-Box service-wages which challenges accepted cultural values. A recent event in Quebec serves as an example of the backlash which can take place by social interest groups.
Religious investors want to put moral pressure on Wal-Mart and not boycott the stores, as the boycott hurts the workers. Quebec milk producers would not reimburse employees for incidental expenses if those products were purchased from Wal-Mart. This is reaction to the closing of the Wal-Mart outlet in Saguenay, Quebec following union certification of its employees.
The Canadian Conference of Catholic Bishops (CCCB) said it will examine Wal-Mart’s anti-union policies and its corporate social responsibility to the communities in which it operates. The issue is one of the rights of workers to join a union, if they choose to do so. Interestingly, the CCCB are saying that this policy could hurt profits and shareholders’ interests. The CCCB along with the US-based Interfaith Centre on Corporate Social Responsibility (ICCR) wants Wal-Mart to adopt its report on sustainability.
6. We feel safe in larger cars as drivers of small cars are at risk; drivers of small cars, in turn, buy larger, less fuel efficient cars; the collective self-interests increase risk to all. To not presume self-interests makes one worse off in a cyclical manner.
7. The current system encourages governments to attract business with lower business taxes, offset by higher property taxes or household tax increases. Countries compete against each other by keeping interest rates higher than others on a marginal basis, therefore, global neighbours respond by raising their rates, and so on.
The East Asian economies referred to earlier, functioned with their government policies of low inflation and fiscal restraint, while fostering foreign investment supplied by hungry shareholders seeking higher returns. With lower productions costs, combined with effective monetary policies, their success should have been assured. Contributing to their downfall was the absence of ethical behaviour and conduct by government leaders who acted in a self-serving manner at the expense of their business community and populous. North American consumers benefited while their Asian counterparts adapted to the changing dynamics in the economy.
This brief look at global economic issues provides further context as to what leads to the global social concern for the role of business and its relationship to society.Reasons Against Sustainability Strategies
A stinging rebuke of the concept of CSR was written by David Henderson, the former Head of the Economics and Statistics Department of the Organization for Economic Cooperation and Development (the OECD) in Paris.
Synopses of his views suggest that the idea of sustainable development is not well-defined and therefore should not be embraced by any corporation. Society’s expectations of business are strongly influenced by NGOs that do not understand the relationship between a market economy and need for profits. CSR advocates are actually alarmists blaming business-related activities for the either-or-decision scenarios they spin to support their cause. The adoption of CSR will lead to higher costs to be borne by the business or its customers. For those corporations that do adopt CSR standards, they will want the other players in the market to compete using the same standards which may not be doable or equitable. The standards could be driven by response to public pressure or governmental legislation. The imposition of well-intended standards could suppress the employment opportunities in poor countries due to circumstances beyond the control of the market such as political indifference by foreign leaders.
Milton Friedman, the renowned economist, articulated the role of business in his book, Capitalism and Freedom forty years ago. He referred to CSR as being a “fundamentally subversive doctrine.” Friedman saw it as the role of the market to distribute wealth as opposed to that of the socialist politicians.
Friedman is steadfast that corporations spend stockholder’s money – not the corporation’s money. Corporations are legal entities that only exist in the interests of their stockholders. Therefore, a corporation should only commit resources for purposes it regards as being socially responsible if it can connect this activity to the corporation’s bottom line. He contends that it is not clear who is defining social responsibility. Where corporations set up departments which manage social relations, these departments typically are adverse to the interests of the stockholders and are a waste of money.
Along with Friedman are the comments from Gilbert Burck in 1973. “…business serves society best when it minds its business well, and that it should take part in social activities only to the extent that these are necessary to its own well-being.” Burck implied that business profits were a good measure of social welfare.
Melvin Anshen expanded on Burck’s ideas with further insights against CSR. Social advocates have not realized that by imposing standards on all businesses is inequitable as they are not all in the same financial position to afford equal contributions, such as employee day care services. CSR could be achieved but only by favouring government controls as opposed to free enterprise.
Focusing on CSR would require executives to take their eye off the ball. It would lead to compromising with NGOs and their specific take on how a business should conduct itself and this would lead to inefficiency and ultimately higher costs. Executives and management must devise new accounting records to measure sustainability and they are not trained to do so. Higher costs would lead to lower profits and dissatisfied stockholders.
Ray Anderson, CEO of Interface, and an outspoken businessman in support of CSR and sustainability, could be an example of a leader that has sacrificed profits for the sake of his personal mission of CSR. In a recent article, National Post writer Peter Foster summarized Anderson’s journey towards CSR and the performance of Interface over the past decade. The results are less than spectacular. To attribute its weak performance due to its focus on CSR would be unfair and to claim that Interface’s reduction in waste and emissions and improved efficiency was a result of its commitment to CSR would be equally unfair. Interface and Anderson have raised the awareness of sustainability significantly but have not shown that CSR makes for a better business model.
University of Guelph professor, Ross McKitrick stated that there could well be a 5% annual decrease in per capita economic growth by 2010 – if Canada cuts 25% of its carbon output. Although Canada signed on to the Kyoto Accord, other countries which we compete against economically – U.S., China, Brazil, and India did not. This puts Canadian companies at a disadvantage. The Canadian government recently budgeted $5B to support its climate change strategy. It is a very debatable program within Canada by industry and economists.
The idea of carbon credits to be traded by Canadian companies as an offset to Kyoto Accord investments is a questionable practice at present. There is not an established clearing house, to date, for an equitable exchange of credits.
Organic foods are widely reported as being a sustainable product although, admittedly cost more. There are few standards in Canada for certifying organic products. There is an implied leap of faith by consumers that certified organic foods actually are organic. This invites a lot of skepticism as to how beneficial the products are and whether the Canadian organic food industry is a sustainable economic venture. TransFair Canada, which is sponsored by the Federal government, provides certification of agricultural products which are traded internationally.
Is the attention on CSR more of a challenge to the capitalist market model? Many of the arguments put forth by public interest NGOs are taken out of context as to their views being correct and business views being completely incorrect but more to the point; business is seen as being the cause for the global problems. Is there room to move between the polar views?
Reasons Against Sustainability Strategies
A stinging rebuke of the concept of CSR was written by David Henderson, the former Head of the Economics and Statistics Department of the Organization for Economic Cooperation and Development (the OECD) in Paris.
Synopses of his views suggest that the idea of sustainable development is not well-defined and therefore should not be embraced by any corporation. Society’s expectations of business are strongly influenced by NGOs that do not understand the relationship between a market economy and need for profits. CSR advocates are actually alarmists blaming business-related activities for the either-or-decision scenarios they spin to support their cause. The adoption of CSR will lead to higher costs to be borne by the business or its customers. For those corporations that do adopt CSR standards, they will want the other players in the market to compete using the same standards which may not be doable or equitable. The standards could be driven by response to public pressure or governmental legislation. The imposition of well-intended standards could suppress the employment opportunities in poor countries due to circumstances beyond the control of the market such as political indifference by foreign leaders.
Milton Friedman, the renowned economist, articulated the role of business in his book, Capitalism and Freedom forty years ago. He referred to CSR as being a “fundamentally subversive doctrine.” Friedman saw it as the role of the market to distribute wealth as opposed to that of the socialist politicians.
Friedman is steadfast that corporations spend stockholder’s money – not the corporation’s money. Corporations are legal entities that only exist in the interests of their stockholders. Therefore, a corporation should only commit resources for purposes it regards as being socially responsible if it can connect this activity to the corporation’s bottom line. He contends that it is not clear who is defining social responsibility. Where corporations set up departments which manage social relations, these departments typically are adverse to the interests of the stockholders and are a waste of money.
Along with Friedman are the comments from Gilbert Burck in 1973. “…business serves society best when it minds its business well, and that it should take part in social activities only to the extent that these are necessary to its own well-being.” Burck implied that business profits were a good measure of social welfare.
Melvin Anshen expanded on Burck’s ideas with further insights against CSR. Social advocates have not realized that by imposing standards on all businesses is inequitable as they are not all in the same financial position to afford equal contributions, such as employee day care services. CSR could be achieved but only by favouring government controls as opposed to free enterprise.
Focusing on CSR would require executives to take their eye off the ball. It would lead to compromising with NGOs and their specific take on how a business should conduct itself and this would lead to inefficiency and ultimately higher costs. Executives and management must devise new accounting records to measure sustainability and they are not trained to do so. Higher costs would lead to lower profits and dissatisfied stockholders.
Ray Anderson, CEO of Interface, and an outspoken businessman in support of CSR and sustainability, could be an example of a leader that has sacrificed profits for the sake of his personal mission of CSR. In a recent article, National Post writer Peter Foster summarized Anderson’s journey towards CSR and the performance of Interface over the past decade. The results are less than spectacular. To attribute its weak performance due to its focus on CSR would be unfair and to claim that Interface’s reduction in waste and emissions and improved efficiency was a result of its commitment to CSR would be equally unfair. Interface and Anderson have raised the awareness of sustainability significantly but have not shown that CSR makes for a better business model.
University of Guelph professor, Ross McKitrick stated that there could well be a 5% annual decrease in per capita economic growth by 2010 – if Canada cuts 25% of its carbon output. Although Canada signed on to the Kyoto Accord, other countries which we compete against economically – U.S., China, Brazil, and India did not. This puts Canadian companies at a disadvantage. The Canadian government recently budgeted $5B to support its climate change strategy. It is a very debatable program within Canada by industry and economists.
The idea of carbon credits to be traded by Canadian companies as an offset to Kyoto Accord investments is a questionable practice at present. There is not an established clearing house, to date, for an equitable exchange of credits.
Organic foods are widely reported as being a sustainable product although, admittedly cost more. There are few standards in Canada for certifying organic products. There is an implied leap of faith by consumers that certified organic foods actually are organic. This invites a lot of skepticism as to how beneficial the products are and whether the Canadian organic food industry is a sustainable economic venture. TransFair Canada, which is sponsored by the Federal government, provides certification of agricultural products which are traded internationally.
Is the attention on CSR more of a challenge to the capitalist market model? Many of the arguments put forth by public interest NGOs are taken out of context as to their views being correct and business views being completely incorrect but more to the point; business is seen as being the cause for the global problems. Is there room to move between the polar views?
Reasons For Sustainability Strategies
Anshen also offered ideas which support CSR. Organizations should define CSR in specific terms for their respective operations. Generalizations related to sustainability detract from an organization’s ability to action such efforts. Transferring costs such as air or water pollution onto society should not be seen by business as a means of economic efficiency. Where industries accept environmental standards, the costs are shared equitably by the market players and their customers, which contribute to social benefits while mitigating individual financial harm.
If organizations do not voluntarily direct their efforts towards sustainable practices, in all likelihood, governments will impose regulations or sanctions to do so. The Kyoto Accord is an example of governmental policy directed at reducing the green house gas emissions.
There are many examples of social legislation imposed on corporations in North America – pension plans, health and safety programs, effluent discharge and allowable rates for the discharge of emissions, with the requisite inspection, testing and assessing of fines where necessary. These have evolved over the past decades as society has exacted greater contributions from business than only employment and shareholder returns.
Paul Hawken’s book, The Ecology of Commerce, states paradoxically, that although businesses of the industrial age contributed to the current state of affairs, business is the only means to implement the changes required in a “restorative economy.” Hawken sees sustainability as a must, as we are exceeding the resource capacity of the planet.
From a marketing perspective, there are boundless opportunities to include social responsibility and be financially successful. The Canadian Business for Social Responsibility includes bottom-line benefits having:
Reduced operating costs
Enhanced brand and image reputation
Increased sales and customer loyalty
Increased ability to attract and retain employees
Publicity and increased public image from good works
Business practices which are based on exploitive practices in foreign countries for the purpose of increasing investor returns is not being tolerated – especially in retail goods. Consumers are better informed and can make choices.
Management guru and Professor Michael Porter with Claas van der Linde argue that a shift to resource productivity will be found between environmental protection and competitiveness. Eco-efficiency will be an outcome of constrained resources.
They point to the flower industry in the Netherlands. Sixty-five percent of world exports of cut flowers on a minimal land base. This required innovation to develop a year round greenhouse capability to support the value chain. Their message – don’t fight legislation but focus on strategic shifts to sustainable resource models.
Continually depleting the natural resources at the current rates of consumption can be averted through investments in alternative energy sources and products. Hydrogen powered vehicles, hybrid energy vehicles, solar power, tidal generation, and thermal energy, are examples which are less dependent on fossil fuels, which are not renewable. Placer Dome, in its Sustainability Charter states, “We must pursue new technology to reduce the impact of mining’s activities.”
Supply Chain Management Practices
The role of a purchasing agent or officer within a corporation requires that this individual act in the interests of the corporation – in Canada, this is referred to as the law of agency. The agent must exhibit fiduciary trust at all times. Therefore, agents cannot act in any way, with good intentions or not, to contravene policies or where corporate policies are absent, to do what they think is good for society. In other words, if they choose to pay more for locally produced goods, rather than bring these goods in from another locale, without a direct financial benefit, they are exceeding their limits of authority – unless there are express or implicit instructions which support these actions. Therefore, one of the main roles for agents is to bring the attention of options which can affect environmental or social values to the executive of their respective companies.
Industrial and commercial buyers and suppliers have and continue to do a good job to address environmental criteria in decisions since the early 80s in response to customer expectations. Green procurement policies to complement corporate strategies are well accepted and are not seen as being more costly with sustainable benefits.
Public sector managers may have an additional dilemma to balance between being an advocate for social programs and the responsibility for administering those programs. This will tempered by the scope of the policy and public support for specific social issues.
The area of social responsibility, whether there is a corporate policy or not, is a whole new area for supply chain professionals to be aware of and to include in their decision criterion where appropriate. Examples of practices to consider are:
1. Work with local social agencies which provide meaningful opportunities to those less able to represent themselves such as:
| Starworks Packaging and Assembly has been successfully providing clients with fulfillment services since 1985. A social enterprise underwritten by the Developmental Disabilities Association, Starworks is not only well managed, it employs workers who love their job and their place of employment. They are conscientious, reliable and are willing to put in as many hours as required to ensure the client’s request is done on time, on budget and within quality expectations. |
The overall achievements of Starworks Packaging and Assembly have been: a) Retention of long term customers.
b) Maintaining a long term workforce, some with over 20 years of service.
c) Creating a “workplace of choice” for those with developmental disabilities.
d) Role model for other social enterprises.
e) Staff are paid real wages for the work they do.
In Vancouver, the Social Purchasing Portal links potential buyers with local suppliers of goods and services. This agency also operates in Winnipeg and Toronto. How it works: |
| In the process of purchasing goods and services companies already choose suppliers – such as food services/catering, printing, packaging, couriers, promotional materials, building maintenance, recycling, and landscaping – based on the values of quality, service and price. In the Social Purchasing Portal the purchasing companies add one other criterion to the selection process: social value.So, all things being equal (price, quality, value, etc.) in quotes from the suppliers of goods or services, the purchaser is interested in one additional component that the provider could offer: what social value can be generated through the purchase agreement? Will the supplier of the services and goods as a part of the contract hire new employees from the targeted training programs? Or is the supplier of services and goods located in a geographically defined development area? |
2. Work with aboriginal entrepreneurs and other small-medium enterprises to identify opportunities which can directly provide good value for services and goods. The newly formed Canadian Aboriginal and Minority Supplier Council (CAMSC) was created to reduce barriers and enable these groups to compete for procurement opportunities in a sustainable effort. CAMSC is supported by the Federal government. CAMSC’s corporate memberships include: Canadian Pacific Railway, DaimlerChrysler, RBC Financial Group, Bell Canada, Cisco Systems and other MNCs.
CAMSC: operates as a private sector-led, non profit membership organization governed by a board of Directors; composed of major multinational corporations operating in Canada. The organization aims to boost economic development efforts and employment. The council is now accepting new corporate memberships from across Canada.
3. Look for best practices and adopt wherever possible. Kotler and Lee recommend several best practices for selecting, developing, and evaluating good corporate initiatives, including:
Select a few manageable social issues to support
Identify and engage community partners
Work where your organization has direct current or future interests
Select programs which complement corporate values or goals
Select programs which identify with key stakeholders – internal and external
Programs should be a long-term commitment not a “flavour-of-the-month”
Programs should support the cause and the company
Monitor, evaluate results, and report out
Best practices in the supply chain can enable organizations to differentiate themselves from a marketing perspective.
4. Investigate alternative materials to substitute for oil-based materials
Cargill has developed and markets NatureWorks® PLA, which is a polymer derivative of natural plant sugars. It has many of the benefits of plastic while being renewable. PLA can be used in rigid packaging and films for bakeries, dairies, meat products, disposable cutlery, drink cups, bottles and can be spun into fibres for mattresses and blankets.
Biodiesel fuel assists to reduce CO2 emissions. The City of Brampton has been running their municipal fleet for ~ two-years on biodiesel. In the lower mainland of B.C., several municipalities are moving to use premixed biodiesel fuel for their fleets. Biodiesel is a renewable alternative which can be made from vegetable oils or animal by-products. It can also include used cooking oils collected from restaurants.
5. Investigate ways to reduce the consumption of water
Cleaning equipment using saturated steam technology uses only 3-4 tablespoons of water-per-minute as opposed to 5-6 gallons of water-per-minute when compared with conventional pressure washers. Metering water through municipal or commercial hydrants reduces consumption and provides a revenue source with increased accountability.
Consider filtering and recycling of rain water for watering green spaces rather than drawing from fresh water reservoirs. Ensure discharges of effluent in waterways meet the highest standards to preserve rivers and streams.
6. Investigate ways to reduce energy consumption
Starting with office equipment and electronics, move on to electric motors, HVAC equipment, windows and doors, appliances, lighting and signage, boilers, elevators, to ensure they are energy efficient. At a minimum, consider ENERGY STAR® rated equipment in addition to Canadian Standards Association or other technical certifications.
Review your distribution network and look at where more efficient shipments can be made and their mode of transport. Consider local sourcing to reduce travel time and distance, saving in fuel.
7. Investigate LEED certification on new projects and renovations
When buying furniture, fixtures, furnishings and other construction related projects, ensure the material specifications are meeting LEED guidelines. In the long-term, operating costs can be reduced. Green buildings and roofs offer sustainable options without increasing capital costs. They are aesthetic, functional, and environmentally friendly. It’s good for our health.
8. Expand the inclusion of environmental standards
ISO 14001 can be applied to the decision criterion for courier and cartage services, as well as commercial and industrial goods. This promotes the idea of alternative fuels and innovative manufacturing methods by suppliers locally and internationally.
Continue to investigate the use of substitute materials which meet or exceed status quo environmental standards – the options are limitless.
9. Get involved with business schools
Local universities and colleges need to be kept current with business practices. Working with their program directors or deans to refresh their course outlines or share best practices, is a means of shaping the next generation of entrepreneurs and managers.
Teaching part time in business diploma or undergraduate programs can be done while working for other organizations. Bringing students into your organization to work on projects is of great mutual benefit.
10. Outsourcing Caveats
Where goods or production facilities are being off-shored or where there is the extraction or harvesting of raw materials, look at the policies and monitor the performance of tier one suppliers and their sub-contractors. Using ILO and other guidelines be proactive to ensure exploitive practices are avoided or mitigated wherever possible, or there is a means in place to improve conditions for workers or their communities. Business reputations are at stake as well as profits. NGOs are looking at their radar screens to identify bad actors on the international stage.
11. Share information
CSR and sustainability are relatively new concepts. Networking with other groups and researching information is a must. Keep stakeholders informed of barriers and enablers. What works in one organization may not work well in another. Adapting is likely better than adopting. Ensure there is a fit with your corporate values and mission statement when considering which nuances of CSR or sustainability to support or commit to.
12. Be Diligent
CSR and sustainability is emerging and will likely not be a fad that goes away. It also requires evidenced-based information to ensure that programs are effective. Reviewing how products are made and introduced into the supply chain is an important step and requires resources to do so. Monitoring and compliance is a key component and may require additional staffing and/r external service organizations to assist – which will add incremental costs.
This will necessitate training and changing business practices. It will take informing and working closer with suppliers if CSR and sustainability are to be a successful corporate strategy and philosophy. It demands the commitment and support of the senior executive group and is a long-term initiative.
Summary
Corporate social responsibility can be contentious – especially for early adopters. There are believers and non-believers inside and outside of your organization. Supply chain professionals are in a position to influence internal decisions which affect materials and design and to encourage suppliers to do likewise for mutual benefits. Be pragmatic and carefully target which products or services could be investigated to ensure sustainable business practices are a viable option. Report out to the business community on practices which are working that do not compromise competitive positions.
Where CSR activities are being introduced into decision-criterion, be sure that the suppliers can get up to speed without unintended consequences, such as not being able to meet specifications or not being able to do so in a cost conscious manner. They will need to have reasonable time frames to develop compatible standards and likely adapt many of their business practices. Monitoring of their performance with constructive feedback will be healthy for industry sectors.
Building a business case and checking on the progress of the implementation or maintenance of the CSR program should assess the relationships between the costs, environmental impacts, and social benefits. Introducing and managing CSR is not that different from other change management practices. Unfreezing, changing, and refreezing.
Above all, remember, good planets are hard to buy!
Larry Berglund, CPP, MBA
August 2005
