MHC International Ltd. - CSR, poverty and terror

CSR, poverty and terror

MHC International Limited - News Item

I noted that in confusing times our way of life was threatened by terror that strikes out of the blue. Martin Wolf of the Financial Times put this neatly when he asked:

"Why do they hate us so much? Along with the shock, anger and grief comes this question. What makes men plan and execute an atrocity on the scale of September 11? To these questions, many offer two answers: their poverty and our policies. Poverty fuels desperation; our policies stoke humiliation. Desperation and humiliation breed terrorism. The answer is to end the poverty and change the policies"

For corporations to have an impact on poverty there are both supply and demand responses. The supply response is equivalent to the development response i.e. a growing and profitable company provides a supply of jobs and incomes. Consequently, to increase this supply requires specific conditions to allow the private sector to flourish. Poverty and inequality conditions in many countries lead to instability, corruption and therefore much unreliability in negotiating contracts. This leads to higher costs in doing business and a general reluctance to work and invest in poor countries. Examples abound, but Singapore, near the top of Transparency International's corruption index, receives more than its fair share of private investment than, for instance, most sub-Saharan countries such as Nigeria that finds itself near the bottom of the index.

Thus the supply of TNCs creates economic growth and employment. Large scale TNCs may provide jobs directly but the overall number of workers in these organizations is probably not more than 100million worldwide out of around 2.4 billion workers i.e. something like 4% of jobs^[1]. There may be as many people again whose jobs and livelihoods are created indirectly by the TNCs such as suppliers or simply those benefiting from the wealth created. However, it cannot be assumed that those who directly obtain jobs are those in poverty. Foreign investment is likely to attract and employ those with high skills rather those in destitution. It is mainly the indirect effects of TNCs that will provide some benefit to the poor - these will be working for the suppliers of suppliers (immediate suppliers of TNCs in developing countries will also likely to be highly skilled). Of the suppliers of suppliers it will be those in small firms or those in self-employment who will number among the poor. Consequently, foreign investment via TNCs will help the poor mainly through a 'trickle-down' effect. This way of doing business is unlikely to change simply because poor people are poor because they don't (in general) have the skills necessary to help themselves out of their own poverty and, consequently, cannot provide the skills require by TNCs.

Demand response

The demand response is a little more complicated. It is what is expected, or demanded, of companies so that they can operate freely. This is a bit of an oxymoron since 'expect' and 'free' are in opposition to each other. This demand is expressed through hundreds of rules and expectations. The corporate social responsibility movement is just one of many such set of expectations that run from initiatives such as the UK's Ethical Trading Initiative, the UN's Global Compact, the ILO conventions and standards to legally binding ones that are enshrined in company law and that come under the heading of corporate governance. Prominent in the demand response are the stakeholders of the organization. There is no accepted definition of who these are but they certainly include internal stakeholders such as owners, managers, shareholders and employees while the outside stakeholders (and this is more contentious) include suppliers, local communities, families, the environment (NGO community) and government. Each of these groups is expressing 'demands' on corporations with, perhaps, only the environmental group even mentioning the issue of poverty. The TNCs response to these demands can affect long-term profitability hence the increasing interest by TNCs in the various stakeholder groups.

Supply and demand response

There is also a third component related to poverty which is both supply and demand and this is when private companies develop initiatives directly aimed at the poor. In many cases this has come under the heading of 'business partnerships' where TNCs seek advantage through better public relations and understanding of local situations. But, normally, when one thinks of poverty alleviation, the private sector often escapes attention and the image of State provided services is conjured up. Yet the poor represent an enormous untapped resource for the private sector that has hardly been explored. The experience of credit programmes for the poor, show that these activities are both sustainable and profitable once the initial capacity building and investment has begun. Awareness by the private sector of this untapped potential is a key role for international organisations and donors as a facilitator in helping the poor to help themselves. Much effort is expended here. Once the poor have their feet on the first rung of the ladder, this development process needs to be sustained through, for example, the continuing supply of credit from the banking system. Moreover when the poor have shown their credit worthiness through Grameen type credit schemes, the culture of thrift is developed and credit records can be passed on to commercial, but not exploitative, lenders.

CSR and poverty

Can CSR have a positive effect on reducing poverty? CSR is a good thing in itself since it leads to better treatment of stakeholders from improved codes of ethics, better conditions for employees, concerns of local communities being considered and less damage to the environment etc. It also leads to increased allocations to philanthropic causes. However, the direct impact of corporations on alleviating poverty, and remember I am talking about large TNCs and not the ëprivate sectorí, is likely to be marginal on the supply side. This is because:

Poor people don't work for TNCs

TNCs do not create many jobs - even the largest corporations only employ about 100,000 to 200,000 compared to a world labour force of 2 to 3 billion

Suppliers to TNCs tend to be high tech. and do not employ poor people in general

On the demand side there is more that TNCs can do such as:

Making sure that products and production processes are safe

Ensuring a pricing policy that poor people can afford (AIDS drugs are an obvious example)

Respecting the environment

Having a philanthropic policy that focuses upon sustainable anti-poverty measures (but see the weakness of philanthropy )

Concluding remarks

In conclusion, there are a number of steps that corporations can take that will impact on reducing poverty. But, these steps are unlikely to lead to major reductions in the numbers in poverty especially as the main focus of business is business which is where their experience lies - few within the walls of TNCs know anything about poverty alleviation programmes and, unfortunately, the rationale for TNCs to have such persons is not overwhelming. Neither do the above lists suggest that there is a lot of mileage in focusing upon anti-poverty measures with the exception of the last item above. Thus the case for a corporation to have a corporate poverty department is not strong since an emphasis on poverty alleviation is unlikely to help a corporation make profits. They may wish to do this for PR or philanthropic purposes but the direct business benefit is not high.

On the other hand, the case for TNCs to have a CSR department is much stronger. There are strong benefits across the board for each stakeholder who, in general, will not be those in poverty. Consequently, even though it is certainly morally and ethically acceptable for corporations to be involved in poverty alleviation the argument plays less well in the boardrooms in Dallas, Tokyo, Hong Kong and Jakarta simply because the impact on profits is marginal. Nonetheless, the atrocities being committed around the world are of obvious direct concern to corporations. Consequently corporations will be asking themselves what more they can do that they are not already doing - CSR provides a framework for analyzing these issues.

[1] Assuming there are around 1000 TNCs with 100,000 employees gives 100million employees. With a world population of 6 billion and assuming about 40% are in the labour force gives 2.4billion workers.