Corporate Social Responsibility August 08

Corporate Social Responsibility

In the past, corporate social responsibility was considered a choice. Within the framework of their business mission and values, corporations could choose the sort of relations they wanted with their workers, shareholders, customers and the broader public, especially the public in the communities where the corporation had major plants or offices.

Smaller companies, including many in agriculture, considered themselves too small to be concerned about social responsibilities other than to their immediate community. Social responsibility was easiest for corporations that had a monopoly or oligopoly position in their industry as IBM once had in mainframe computers or AT&T in telephone services. But, times have changed. Firms and industries will be increasingly held responsible, not just for their products, but for the firm's broader impact on society.

The Demand for Corporate Social Responsibility
What has changed? Increasingly, consumers are being encouraged to use their purchasing power to vote, not just on the quality of the products that they buy, but on the social responsibility of the companies that supply those products. The movement has grown large enough that major retailers in many countries have jumped on the bandwagon. They, too, are willing to use their purchasing power to vote, not just on the quality of the products they stock, but on the corporate social responsibility of the firms and industries who supply them.

The Supply Cost of Corporate Social Responsibility
The supply of different forms of corporate social responsibility is not costless. For example, higher wages, increased sick leave or extended vacations for employees will increase the variable costs of labor. Reducing emissions may require investment in new equipment that must be amortized over some future period. In some cases, investment in new equipment now may lower operating costs later. The potential impact of each venture into corporate social responsibility needs to be measured in terms of its effect on the firm's supply curve.

Meeting Corporate Social Responsibility Requirements
Unfortunately, no one has yet been able to separate out what part of total demand relates to the product and what part to corporate social responsibility requirements. It is even more difficult to separate out the rewards for different forms of social responsibility. For example, how does the premium for having exemplary worker relations compare with that for minimizing CO2 emissions or having ethical marketing practices?

On the other hand, even if a farmer or marketer could accurately measure the costs of different initiatives, could they pick and choose between different requirements (ignoring some and emphasizing others) so as to maximize profits without being castigated by retailers or consumers?

Future Binding Requirements
Much of the present uncertainty stems from the fact that the components of corporate social responsibility are still evolving. For example, the Economist of January 18, 2008 reported on a McKinsey survey that asked executives in five different countries which issues would be the most important in the next five years. Executives in Britain and Brazil placed the environment as the number one issue while those in the United States, Germany and China placed it number two. Health-care benefits came first in the United States and China, retirement benefits first in Germany.

However, as the McKinsey survey showed, there were considerable differences in rankings on a wide range of issues. Even within one country, Wal-Mart, Supervalu and Costco may disagree on what the most important elements of corporate social responsibility should be for their suppliers. The problem becomes even more complex for the many firms that market to many retailers in many different countries.

The Economist article points out that India has a long tradition of large, family-owned corporations providing basic services such as schools and health care to local communities. China, Brazil, Russia or other emerging economic powers may have different priorities. The sovereign wealth funds from the Middle East and Asia that have become big investors in western companies may have still other priorities.

Priorities Still in Flux
Neither individual governments nor multinational agencies like the United Nations or the International Labor Organization have been able to agree on what the priorities of corporate social responsibility should be. In the meantime, NGOs and other activist groups will play a key role in the public relations battle over what requirements should be primary and what should be secondary.

Individual firms or industry groups in the global apple industry that are large enough to make an attractive target for consumer, retailer or activist pressure need to begin the process of preparing for the new requirements for corporate social responsibility that are on the horizon. If they can understand the demand implications of each requirement and prepare now to mitigate the supply side effects of these requirements, they will be in a better position to manage them effectively and profitably.

From the World Apple Report, April 2008

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