Getting Rid of “Responsible” from “Responsible Business Conduct”

Global Forum Business Conduct
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Today’s post is by Bhaskar Chakravorti Senior Associate Dean for International Business & Finance at The Fletcher School, Tufts University, and founding Executive Director of Fletcher’s Institute for Business in the Global Context. He is the author of “The Slow Pace of Fast Change.”

Today’s OECD Global Forum on Responsible Business Conduct comes not a minute too soon, with far too many recent examples of irresponsible – and, in many cases, criminal conduct – in international business. There is reason to worry that such problems will worsen as the center of gravity of the world’s economic activity moves towards the developing nations, since the necessary institutions and the context within which global business operates have not had the time to catch up with the rapid market changes. For this reason, business must take on a disproportionate share of responsibility to compensate for the missing institutions.

Of course, simply putting people together in a room will not resolve all issues. But we can make a start. I am particularly excited about the fact that I have the privilege of moderating a discussion with leaders representing multiple stakeholder groups during the opening plenary. We can help establish a tone for the Forum.

One of the themes I would like to explore is how to make the “responsible” adjective in the term “responsible business conduct” redundant. Responsibility is a rather loaded term. It suggests that decision-makers in the business world want to conduct themselves in one way, while responsible business conduct would require something quite different.

You cannot scold, regulate, punish and nag your way to responsible conduct. It has to become part and parcel of regular business practices. This means that everything that comes under the label of “responsibility” is compatible with the natural incentive systems that drive managerial conduct. I see four developments that might offer clues on how to make responsible conduct compatible with managerial incentives.

Environmental, Social and Governance Investing (ESG) Criteria and Shareholder Activism. To understand what drives business conduct, follow the money. What if money were not to follow you if you deviate from responsible conduct? ESG investing aims to do precisely that. Beginning with the churches in the 1920s that excluded “sin stocks”, ESG compliant portfolio managers screen companies that do not meet certain environmental, social and governance criteria. This can make a difference to the conduct of managers.

In addition, and perhaps even more significantly, such investors also engage in shareholder activism that has a significant impact on executive decisions. But this also requires a larger body of clients who demand such criteria from their portfolio managers.

At least $13.6 trillion of assets under management incorporate ESG concerns into their investment selection and management, according to the Global Sustainable Investment Review 2012, representing 21.8% of the total assets under management in the regions covered.  In addition to religious institutions, there are other major investors, such as state pension funds and corporations, who have an interest in growing this form of investing.

Creating Shared Value. This approach focuses on areas where responsible conduct can help in growing the pie rather than asking managers to consider a zero-sum situation between business interests and those of other stakeholders. Michael Porter of Harvard Business School argues that this can be accomplished by re-conceiving products and markets, reconfiguring value chains, enabling local cluster development. These notions take on a particularly crucial role in the emerging markets where many key institutions are missing or have not kept pace with market growth.

Tailored products and helping to fill gaps in the context can clearly contribute to longer-term value creation despite the near term costs, and provide incentives to managers who take a longer view. The challenge is that most managers have been schooled in Porter’s earlier framework of the Five Forces model, which places a high premium on playing in industries where managers can optimize on their negotiating power. This is based on a static concept of industries and markets and has more of a zero-sum connotation. So I am glad Professor Porter is taking the lead in dismantling a framework – ill-suited for dynamic market contexts – that he had originally created.

Rewards for Optimizing Needs of Multiple Stakeholders. Good managers inherently manage competing demands from several parties and take pride in setting priorities and making trade-offs. Many managers and executives often start out as entrepreneurs primarily motivated by a “purpose” that extends well beyond profit. These inherent traits of many managers tend to remain under-utilized and under-rewarded. Reminding managers of such inherently powerful motivators and reinforcing the mindset can prove to be a powerful incentive to look beyond the demands of shareholders or the analyst on Wall Street – and consider the needs of other stakeholders: employees, consumers, the environment, advocacy groups, the market ecosystem, etc.

It is extremely important to get enough of a community of peers to come together around such a notion to enhance managerial motivation. But most critically, such an initiative has to be led from the very top of the corporate hierarchy and must be consistently applied to the managerial rewards systems affecting decision-makers at every layer. It cannot work if the CEO says one thing in public and then goes back to the line management and simply rewards them for “making their quarterly numbers.”

CEOs can take comfort in the analysis by Raj Sisodia of Babson college that 18 such publicly traded companies out of the 28 he studied outperformed the S&P 500 index by a factor of 10.5 over 1996-2011. Sisodia and Whole Foods’ founder, John Mackey has now started encouraging a community of such peers to gather as “conscious capitalists”.

Legislating CSR. Finally, another way to align managerial incentives with responsible business conduct is by simply requiring it by law. India might become the first country to have mandatory CSR: a Bill in the Parliament requires companies above a certain size to ensure that they spend at least 2% of annual profits on CSR activities. It is hard to tell how productive such a measure might be, but it offers an opportunity for the wider international community to observe and learn from an experiment in taking a blunt instrument approach to the problem.

We are in effect coming to the realization that singling out responsible conduct can set it outside the realm of business-as-usual. Paradoxically, the way to ensure more responsible outcomes, may be to aspire to the day when we do away with the notion of responsible business conduct. For it to be a reality we must create mechanisms and incentives that produce a larger overlap between responsible business conduct and plain, unadorned business conduct.

Useful links

Inaugural Address by Her Excellency Dr. Dipu Moni, Foreign Minister of Bangladesh, at the OECD Global Forum on Responsible Business Conduct (pdf)

OECD Guidelines for Multinational Enterprises

OECD Policy Framework for Investment User’s Toolkit

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