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What Should We Really Expect from Big Business?

By Simon Zadek. Source: Global Thinking, Winter 2001

Simon Zadek argues that we should enlist corporations to tackle poverty and environmental degradation in this essay based on his forthcoming publication for the Foreign Policy Centre, Public Policy and Business in Society

Successful corporations have changed from 'financially viable producers and purveyors of goods and services' into vast profit-needing institutions that, almost coincidently, deliver goods and services. Extraordinary facts about this historic transformation have been turned into apparently mundane truths. Consider their size. It has become almost passé amongst opinion leaders to point out that 51 of the 100 largest economies in the world today are corporations, or that the top 200 corporations have sales equivalent to one quarter of the world's total economic activity. We seem to accept as normal that General Motors has annual sales equivalent to the GDP of Denmark, and the annual sales of Sears Roebuck's are comparable to the total annual income of over 100 million Bangladeshis.

Global corporations, for better or worse, dominate the political economy of developing countries and super-powers alike. Their investments underpin the capital base of many emerging economies, and their donations are essential to ever-more-costly political campaigns. Not surprisingly, these mega-institutions are accused of sapping the means – and perhaps the will - of national governments to represent their citizens' best interests. The effect of this, it is claimed, has been to drive down the floor by cutting public spending, privatising public assets, exploiting often severely curtailed public services for private profit, and drawing back from any regulation that constrains business activities.

Our attitudes towards corporations is neurotic, to say the least. Corporation's point out that people continue to buy their products, work for them and invest in them. But it is also true that these same people are savagely cynical about corporations - they really do not like them. It is this combination of antipathy and dependency that lays the foundations for explosive contradictions in the relationships between business and society. The events of 11th September have shone a spotlight on attitudes towards the West around the world. Though not the motives for the terrorist attacks, some of the negativity directed at America around the world is rooted in people's sense of anger and frustration at the corporate expansionism that they feel lies outside of the control of communities or governments. This is why the demonstrations from Seattle to Genoa cannot be dismissed as isolated incidences by a few unrepresentative crazies – as many of our mainstream leaders would have them seen. Both demonstrations and terrorism are visible edges of deep fractures in national and global social contracts.

Companies are responding, whether by virtue of their enlightened leadership, or the brute force of market pressures. At the first base, the corporate community responds by arguing that it is 'doing its job' by creating economic wealth. After all, they argue, over three quarters of international investment in developing countries – the lifeblood of economic growth - comes from private sources. It is certainly true that anti-corporate views typically under-value the positive income and wealth gains that can accompany globalisation. However, this social and economic case for globalisation is fair game for researchers as well as street demonstrators. A recent study by the Washington-based Centre for Economic and Policy Research, for example, suggests that the economic growth rates of the majority of developing countries, and many human development improvement rates, had worsened during the period of accelerating globalisation (1980-2000) as compared to earlier periods.

Until recently, corporate citizenship was in its first generation, largely a defensive exercise in reputational spin, often involving 'bolt-on' philanthropy unrelated to a company's overall operations and impact. But some companies are evolving towards the second generation of corporate citizenship, linking explicit social and environmental aims to their core business strategies, to their brand-building and relationships with consumers, to the productivity of their employees and their relationship with Government.

The dilemma is that the second generation of corporate citizenship – however enlightened and evolved individual companies may become - will not deliver the gains needed to put a meaningful dent in the facts: nearly one in three of the world's workforce are unemployed, 1.2 billion people live on less than US$1 a day, and 840 million people are more or less permanently hungry. Neither will it reverse the facts that half the world's original forest cover has disappeared, and overall the Earth's ecosystems are said to be degrading at about 3 per cent a year.

A third generation of corporate citizenship is needed where the corporate world supports national governments and the international community in re-writing the global rules of the game. Without this third generation, those businesses honestly seeking to contribute in addressing serious social and environmental challenges will find themselves short-changed in the markets as consumers become cynical in the face of a manifestly worsening situation. This in turn will encourage the financial markets to retain its short-termist attitudes, further pressurising companies to abandon potential long-term win-win corporate citizenship strategies.

Of course, the critics of corporate citizenship are absolutely right in arguing that it can be superficial, or at least wholly inadequate. In its worst form, furthermore, corporate citizenship can be a deeply conservative safety value that offsets the pressure for much needed structural change in markets, the ways of the business community, and the role of government.

Where I part ways with these critics is that I do not think that such outcomes are a sine qua non of corporate citizenship. The results of corporate citizenship are not pre-determined – as both its strongest advocates and its most vehement critics suggest.

Corporate citizenship has evolved in an essentially ad hoc manner, largely driven by the vision, enthusiasm (and occasional naiveté) of people 'just trying to get things done'. This has been fine to get going. Indeed, this bedrock of gifted amateurism goes some way to explaining the leadership role taken by the UK in the field of corporate citizenship. However, such a fragile base is inadequate as corporate citizenship reaches its current scale and potential significance. The point has come where it is important to step back and ask some basic questions as to where this is all going.

The forthcoming pamphlet for the Foreign Policy Centre, Third Generation Citizenship, explores the public policy dimension of corporate citizenship in asking, and seeking to answer, several fundamental questions about the role of business in society.

Corporate citizenship to date has delivered a number of significant changes in practices and outcomes, and is likely to continue to do so. But there is no clear set of rules and expectations about what a multinational corporation should do in any particular case. There is little point in blaming Nestlé for the impact on the South African economy of a collapse in gold prices, Monsanto for the level of HIV/AIDS across the African continent, or Credit Swiss First Boston for the state of Britain's railways. The fact that Nike trainers cost, say 30-50 times more than the labour costs of production does not really tell us how much workers in their supply chains can be paid given, for example, the pressures from the financial markets. Did BP – given its leadership in fighting global warming - really have to make such a large contribution to George W's presidential campaign as part of its US license to operate?

What can we realistically expect from individual corporations? It is hard enough to map out what seems fair for individual businesses to contribute. But it is quite another thing to suggest that the business community be required philosophically, institutionally and legally to play a role in the delivery of public goods. What explicit responsibility should business have, for example, to secure reasonable livelihoods for a community's citizens, to raise education levels, combat violence on the streets or to join the struggle against racism? Should the limits lie where profitable opportunities exist, essentially the current approach to public-private partnerships? Or does businesses' growing political and economic weight bring with it a need to rethink their responsibilities?

There has already been some movement down this path. Some companies now set carbon emission reduction targets linked to inter-governmental agreements. In the Netherlands, high-level agreements between the state, business, and labour set national targets for addressing long-term unemployment that are then translated into operational targets for each participating company. However, in the main, even the best of corporate citizenship does not explicitly link social and environmental performance to public policy goals and targets. To do so would take us into the third generation of corporate citizenship, where business takes on and is accountable for public policy objectives as a legitimate element of the business.

The enhanced role of corporate and civil society is often framed as being accompanied by a shrinking role for the state. At the extreme, argue some, we are facing an irrelevance of traditional government in a borderless world.

Actually, the reverse is the case. The role of strong government is all the greater where business forms an important mechanism for delivering public goods. Indeed, the more we rely on diverse institutions to deliver public goods, the more (not less) do we need over-arching stewardship that democratic and accountable government provides to ensure that it all adds up to the right level delivered in the best way to the right people.

The challenge is therefore not whether but how governments should engage in securing businesses' contribution to achieving public policy aims. It is clearly not possible to focus purely on national legislation in enhancing the contribution of business. Such a focus would lead to an outflow of mobile capital and a loss of competitiveness for relatively captive capital (particularly smaller businesses) that nevertheless faces international competition. At the same time, an approach that merely exhorts business to 'do the right thing' does not have a significant impact

A third generation corporate citizenship strategy provides a key element in overcoming this apparent policy double-bind. Firstly is the fundamental principle of corporate citizenship, that business has a legitimate and necessary role to play in the effective delivery of public goods. The implications of this would be profound. Contrary to the current view expressed within the Company Law Review, for example, it would imply that business requires a broader regulated framework. Government must pursue this at national, European and international levels if there is to be any hope for third generation corporate citizenship to be taken seriously within the corporate boardroom.

Second is the principle of competitive citizenship, where government needs to do far more to enhance the competitive gains from corporate citizenship. It is simply not enough to sponsor awards for good companies. There is no reason, for example, why the corporate tax regime should not reflect the government's interpretation of good corporate citizenship. Similarly, there is enormous scope for orienting government procurement to such performance criteria. The long-standing objection to this as running contrary to 'value-for-money' does not stand up to serious scrutiny for any government committed to 'joined-up-thinking'. Similarly, the objection that such policies would be inconsistent with international agreements either remains untested, or underpins the case for taking this agenda onto the international stage.

Third is the principle of public accountability and disclosure. The growth of public-private partnerships has opened up a major democratic deficit, and there is growing evidence that this is not offset by adequate performance of these partnerships. The shortfall here does not lie, in the main, with the business community. Rather, it lies in the archaic and totally inadequate mechanisms for ensuring public sector accountability in its dealings with business. Public accountability needs to reflect the new reality of public bodies being increasingly empowered and indeed cajoled to enter into arrangements with parts of the business community. The activities of politicians and civil servants need to be more visible, as must be the basis for their decisions. Service shortfalls and cost-overruns associated with privatisation, inadequate regulatory oversight, or inappropriate partnership arrangements need to be published and those responsible penalised.

Fourth is the principle of standardisation. The Government is supporting work in this field, such as the SIGMA initiative of the British Standards Institute, Forum for the Future and the Institute of Social and Ethical AccountAbility. However, there is a need to accelerate such work and bring closure in agreeing a basic framework for social, environmental and overall sustainability accounting, auditing and reporting that will underpin tomorrow's equivalent of today's Generally Accepted Accounting Principles. This need must ultimately be met at an international level. Government should use the advent of the European Commission Green Paper on Corporate Social Responsibility to promote European-level initiatives, and also take this forward as a pre-requisite to any serious progress in the sphere of international trade and investment.

Fifth and finally is the principle of global accountability. If competition and trading rules are to be set globally, then it surely follows that so should the rules under which corporations define their social and environmental performance. The case of General Pinochet, arrested in the UK for alleged human rights abuses in Chile, sets the precedent that should now be applied to all businesses. The US does not seem to have a problem extending its own jurisdiction to global dimensions when it comes to matters like Cuba. Similarly, the OECD convention on foreign corrupt practices opens another route for establishing global rules for global corporations. Interestingly, there is real potential for support for such a move from those companies that have invested most in corporate citizenship. Nike's CEO Phil Knight has called for global, mandatory social audit standards for all corporations. But irrespective of the level of such support, the Government can and should take a lead in promoting mandatory, global business standards as a pre-condition for any further liberalization of international trade and investment.

There is a need to move to the Third Generation of corporate citizenship. Without this move, current leadership successes – although admirable – will whither as public cynicism grows in the face of escalating and all-too-visible social and environmental problems.

Dr Simon Zadek is currently Acting Chief Executive Officer of the Institute of Social and Ethical AccountAbility. This article is a personal contribution based on his recent book, 'The Civil Corporation: the New Economy of Corporate Citizenship' (Earthscan), and a forthcoming pamphlet from the Foreign Policy Centre and AccountAbility. More information at www.zadek.net.