CSR and the financial crisis: so things can only get better?

We are trying (without too much success) to avoid getting too obsessed about the current financial crisis. But it is kind of hard to ignore, especially as it clearly has a lot of significant implications for issues of business ethics and CSR. Anyway, we thought we'd make just a few quick remarks about our last poll which saw more than 60% of our respondents siding with the idea that the crisis should lead to more CSR - and only 14% believing it would lead to less.

It's an interesting, and optimistic result, which, to be honest, we were a little surprised about. Clearly many of our readers are seeing this as a watershed moment that may create a whole lot more momentum towards responsible business practices. It is difficult to predict, but at the moment, most of the discussion seems to be more about how to better regulate business (and markets) rather than how to encourage responsibility (the assumption apparently being that business, and the finance industry in particular, is led by greedy, self-interested fat cats with little concern for the public good).

Some of the soundings we are getting at the moment are not too promising, it has to be said. There are a lot of people talking about the need to "tighten our belts" in readiness for an upcoming recession. Plus, it should be remembered that the recent drive towards CSR is also a part of the movement towards deregulation and liberalisation in markets that has got us where we are now. So its good to see that the CSR movement (or at least the part of it that reads our blog) remains optimistic about reform. Only time will tell...

The Oscars of Corruption

One of the most important rankings in the world of business ethics was updated and released last week: the ‘Corruption Perception Index’ (CPI) of Transparency International. Founded by the former UN aid worker Peter Eigen the Berlin based organization regularly collects extensive data on how countries in the world are perceived with regard to corruption in business and politics.

Sweden, New Zealand and Denmark top the list while Iraq, Myanmar and Somalia come out at the very bottom. But it is not just a list where rich Western industrial democracies win while poor developing nations lag behind. It’s interesting to see who went up and who went down. Britain took a hit, as did France and Germany – all due to high profile corruption cases in recent years. We talked about the BAE scandal in the UK in this blog which appears to have led to a drop in the UK's rating – in particular the government’s decision not to pursue the case due to ‘national security concerns’. Endemic corruption at one of Germany’s biggest companies, Siemens, arguably contributed to a drop in the ranking for Europe’s biggest economy. The US comes out 18th – just before St. Lucia – largely perhaps because of dubious campaign finance practices and special interest lobbying in Washington.

You might by now have noticed that one of the recent ‘pet theories’ of Crane and Matten focuses on the political role of the firm. Seen through the lens of the CPI the collusion and non transparent role of business in politics is interpreted as a form of corruption. And the fact that by no means all democratic countries lead the ranking and some of the them even dropped can be seen as an indicator that the political role of the corporation is on the rise.

So what is the solution? Clearly, there is still a role for strong government. The top countries, in particular Sweden and Denmark, are long standing democracies with a strong welfare state where the spheres of business and politics are reasonably held apart. Georgia, Nigeria, South Korea or Turkey – all countries which improved their ranking – did so mostly through improvements in the political governance of these countries.

But generally, we would argue that the CPI reflects the rise of private business in influencing politics, both for better or for worse. One way of addressing this then might be to just tackle these issues from the business angle. Some of the most creative approaches to eradicating corruption focus on business-government relations, such as the Extractive Industries Transparency Initiative (chaired by Eigen). Creating more transparency, clearer accountability and new forms of democratic control, both for governments and powerful corporations can be effective in addressing corruption. After all, corruption is not just an ethical issue: a one point improvement in the CPI coincides with 0.5 percent increase in GDP and a 4 percent rise in average income of a country. In particular in the global south, corruption translates into a matter of life and death for ordinary people...

Will the financial crisis lead to more or less CSR?

As the turmoil in financial markets continues unabated, some of those in the responsible business arena are considering what the likely effects of all this are going to be on the practice of CSR. The last decade or so has seen a seemingly unstoppable rise in interest, attention, and action on CSR issues, at least from some quarters of the business community. But with recession around the corner (or apparently already arriving for some countries), what is the prognosis for responsible business when times are hard?

Out here in the blogosphere a range of opinions are circulating. One post that has gotten quite a lot of attention came from Adam Jones of the Financial Times, who was among the first to raise the issue, and ended up somewhat hedging his bets:

"I suspect there are lots of Milton Friedman-reading managers in the private sector who grumblingly tolerated CSR programmes during the boom and would now love to get rid of them on similar cost grounds. Instead of throwing the money changers out of the temple, it would be a case of throwing the CSR priests out of the marketplace. But that would be a pretty dumb move at a time when the public mood is for more accountability and regulation, not less."

Reenita Malhotra, writing on her "Inspired Economist" blog, focused on the specific effects on CSR in the investment banking industry, arguing that such enterprises should be protected exactly because of their positive social benefits:

"A high return on investment has enabled many of the investment banks to show a solid to commitment to corporate social responsibility in the last few years"

Taking an opposite point of view, Nic Paton at the online resource Management-Issues suggested that a lack of attention to genuine CSR was actually to blame for the crisis in the first place:

"While many companies believed they were engaging in corporate social responsibility, they were in fact missing the point. Truly responsible business, rather than chasing a fast buck and in the process taking overly dangerous risks, would have considered the interests of all those who had a stake in their business."

Finally, Mallen Baker, writing for Business Respect, has taken a similar line, but has also sought to move the debate forward by looking at what this should mean for practicing CSR in the future

"Bear Stearns produced no CSR report of any sort. Lehman Brothers did not produce a CSR report, but they produced a philanthropy report. Even if they had gone further, it seems unlikely that the complex nature of how they created wealth would have been a feature. Now it needs to change. If anything is to come out of this, it has to be that corporate social responsibility once and for all leaves behind the philanthropy tag, and we see clear focus on two areas:

* How we create a different ownership structure for businesses where responsibility for consequences is a more real feature of share ownership.
* That the oversight and accountability demanded of companies now goes into the detail of how they make their money - and what are the consequences of their actions.

Two months ago, such concepts were unthinkable. Now they are essential."

Pretty profound stuff. But the prognosis for CSR is, as far as we can see, far from clear. Changing ownership structures for businesses seems a long way off, unless by this Baker means the movement into public ownership of banking institutions in the UK, US, Iceland and elsewhere. But somehow we doubt that's what he is getting at.

So, really, it's probably too soon to say for sure what will happen next on the rocky road of CSR. But hopefully our poll at the top of the page will give some indication of where our readers think it should be heading....

‘Are we all France now?’

That’s what Jon Stewart asked his guest Bill Clinton on the Daily Show a minute ago. They were discussing the proposed 700 billion (!) bailout for the financial industry proposed by the Bush administration today.

This is inspiring stuff. Who would have thought that the government most committed to reinstall freedom of markets, low taxes and ‘small government’ is now intervening directly in the economy in an unprecedented way. We blogged about similar cases in the UK and France recently – but what the US government intends to do here eclipses all the others.

We find it interesting from two perspectives. First, it is one of the classic examples of an ethical problem. On the upshot, yes, the financial industry is in trouble and the effects of further bank collapses would be massive - for the economy in general, but more concretely for jobs, home owners and ‘hard working’ Americans (and beyond). But on the other hand, why bail out an industry which has enjoyed fairytale profits in recent years, not to talk about bonuses and executive salaries far beyond imagination?

From a ultilitarian perspective (see Chapter 3 of Crane & Matten) maybe everybody would be better off by the bailout. But what about fairness and justice - providing healthcare for children has been anathema for the US government so far, yet would have cost much less. Or from another perspective, what about the consent of taxpayers to spend what amounts to $5,000 each in tax dollars for this massive bailout package?

The second aspect hints at the political role of private corporations. To have enough to live of in old age (i.e. pensions) and having a roof above your head (i.e. homes/mortgages) are obvious issues: access to these for a long time was considered a basic civic entitlements of citizens. That’s why welfare states in Europe still provide (or tightly regulate) access to these commodities. The US though has been at the forefront of creating markets for these things. As we see, the corporations in charge have failed at administering them – maybe because they shouldn’t have been in charge of these issues in the first place. And that’s why the government now feels it has to step in. The bailout now is an attempt to help out as a one-off. But it raises the general question we have discussed at length in our just published recent book: if corporations are now responsible for administering basic entitlements of citizens would it not be just fair to apply the same rules of transparency, accountability and democratic control as we do to governments? It is fascinating to see this debate and we guess it is far from over.

Ethics and financial crisis

With stock markets plummeting, financial institutions going belly-up, and governments on both sides of the Atlantic stepping in to bail out failing companies, the prospects for investors, the financial community, and even tax payers do not look good. And with the likely knock on effects for employment in other sectors almost certain to result in job losses, the fall-out from the current market turmoil is going to be widely felt.

For us business ethics professors, however, the picture is somewhat mixed. On the one hand, issues of social responsibility tend to be higher on the agenda when times are good. On the other, when greed and corruption contribute to downturns (such as in the post Enron wake of the early 2000s), significantly more attention can shift to issues of integrity and governance in business. Its no coincidence that the 2000s have witnessed perhaps the most sustained growth yet in the corporate responsibility 'industry' and in courses, books, conferences, and workshops on the subject.

Today's financial crisis clearly has at least some of its roots in corporate iresponsibility around the subprime mortgage market in the US. If 'responsible lending' practices had been observed (or if tighter regulatory oversight had been imposed), we might not all be in this position right now. Certainly, the financial industries of other countries appeared to be more attuned to the problem than in the US, such as in the UK, where the British Banking Association has in place a code on responsible lending:

Responsible lending is providing credit, based on background checks and professional judgement, to people who can accommodate regular repayments without getting into financial difficulty.

But although the sub-prime problem was the rockfall that got the financial landslide going, there are a number of structural issues that also need to be considered. And here we need to perhaps look at deeper institutional issues rather than the ethics of individual people or companies. As with Enron, the fault lines for disaster run through the system of risk management, regulation, transparency, business interdependence, and reward systems, not simply rogue traders crossing the ethical boundaries.

There are ethical issues here too of course, but they are at a different level to the ones that most people think of when they think about corporate responsibility. Here, we are talking about the ethics embedded in business systems and institutions, and how ethics and the law intersect to ensure that markets work effectively, fairly, and ultimately securely. Sure, a lot of our current problems with the financial crisis can be put down to individual greed, mismanagement, and bad decisions, but ultimately it goes deeper than that. Whether this means that the current crisis will be a boon to business ethics however depends on how well us ethical experts manage to get to grips with these deeper level problems.

For further reading on this, check out our paper on challenges to the business ethics curriculum, published in an early version available free online and later in the Journal of Business Ethics.