Tuesday, February 3, 2009

Corporate social responsibility and development in Mauritius


Daniel Litvin is author of ‘Empires of Profit: Commerce, Conquest and Corporate Responsibility’ and is Senior Research Fellow at Chatham House. He is founder of Critical Resource, a London-based consultancy specialising in social and environmental issues facing big corporations. Here he talks to Sean Carey about whether big companies and corporate social responsibility (CSR) will survive the economic downturn and some of the implications for Mauritius.

* What exactly is corporate social responsibility?

In essence, CSR is a voluntary effort by companies to behave ethically partly in the hope that this will boost profits. For example, it can involve a range of things including philanthropy; putting policies in place which respect employees; and behaving well towards customers and suppliers. These sorts of things, so the thinking goes, will help companies deliver good returns over the long run.

* What are the origins of CSR?

As a term or phrase CSR is only about 20 years old. But as a concept it is several hundred years old. The first large companies of the modern era like the East India Company did many inexcusable and nasty things including waging war but they also often helped build schools, hospitals and other infrastructure in the parts of the world they invaded.

* Bring us up to date -- which companies are keen on CSR these days?

Well, the days of invading territories are long gone. But, to give just a few examples, modern day British retailers like Marks & Spencer and Sainsbury’s claim to operate with an ethical dimensional by raising their environmental standards, for example. And companies like McDonald’s which claim they are making their food healthier are often doing so as part of a CSR programme.

* Are there certain sectors which are keen to promote CSR more than others and, if so, why?

Traditionally it's been the companies that have historically been under pressure either from the public or from politicians that have taken these issues the most seriously. The giant oil and mining companies like Shell and Anglo American have been very keen on CSR for over a decade now.

Similarly, in clothing and footwear companies like Nike and Reebok have boosted their CSR efforts because of all the allegations, fair or not, about sweatshop labour from their overseas suppliers. Pharmaceutical companies like Glaxo SmithKline have also come under pressure to invest more in CSR because of issues like pricing of AIDS drugs in Africa.

* So no one does it out of altruism or benevolence then?

Well, doing it out of benevolence and because there is a lot of public pressure are not entirely inconsistent, in my opinion. The latter can encourage the former in companies. It's not always like that, of course. For example, a lot of the smaller fair trade companies which export goods like cocoa, coffee, sugar and handicrafts from developing to developed countries have been set up as social enterprises which are intended primarily to produce benevolent effects but which also, they hope, make money.

* But overall is CSR more the province of larger rather than smaller firms?

Large firms tend to have bigger budgets to allocate to CSR departments. And, of course, it's no coincidence that firms like, say, Shell or McDonald’s have global brands to protect. But I would argue that even if they don't have a global brand it is very important for small companies to protect their reputation. It won't do them any good and it will tend to damage their business if they are seen to be exploitative of their employees, for example.

* Does CSR have a role in the public sector?

In a way, CSR doesn't really apply to the public sector. It's a device specifically designed for companies. It's all about voluntary self-regulation for institutions which have profit as a goal. By contrast, the state is all about increasing the public good anyway. But elements do travel across from the private to the public sector – take the pressure on government departments in the UK and elsewhere to reduce their energy consumption, for instance. Climate change is a big subject for all sectors now.

* Former US labour secretary, Robert Reich, has argued that CSR is about window dressing -- put simply, an attempt to improve the brand image of big corporations in order to pull the wool over the eyes of poorly informed consumers and regulators. Reich suggests that elements of CSR like environmental and working conditions are for governments to sort out and not the responsibility of individual corporations. Is he right?

Well, there are two points here. First, it is precisely because governments have often failed or found it difficult to regulate that the burden has rightly fallen on companies. Let's take climate change: at an international level governments have failed to put in place sufficiently tough regulations which would reduce CO2 emissions. This has meant that a number of companies have voluntarily tried to reduce their carbon footprint. In other words, these companies have begun to step tentatively into the gap left by the failure of governments.

Secondly, in developing countries there is sometimes simply an absence of government and so companies are really obliged to step in. I’ll give you an example from the oil sector in Africa and Asia: here companies are often operating in particular poor and undeveloped regions in countries like Indonesia and Nigeria. In these areas central governments may not be providing basic things like education, health care, transport or electricity and so companies step in and create facilities and infrastructure which, at least in theory, should benefit local people.

* Of course, Reich makes his point from a centre-left position but a similar argument was proposed by the most famous free-market champion of recent years, the late Milton Friedman. He said that while companies should abide by government legislation their business was quite simply to maximise profits and that CSR was irrelevant.

Yes, one of Friedman's famous phrases was "the business of business is business" -- maximising shareholder value, in other words. But the obvious answer to that is the state of the global economy in the last year in which an excessively narrow focus on "the business of business" in the finance sector has almost brought the global economy to its knees. It's been both a failure of governments to regulate and the failure of businesses to understand their broader ethical responsibilities and focus too narrowly on short-term profits. So I think Reich and Friedman from their different political perspectives have both got it wrong.

* What lessons from CSR are relevant to developing countries?

I think CSR has a big role here precisely because governments are often less effective at regulating business in developing countries. One of the reasons why there has been so much controversy over sweatshops in countries like Bangladesh, Indonesia and Vietnam is that these governments have not always consistently implemented their own labour regulations (such as those outlawing child labour, for example). This means that companies which have to protect global brands often have to work on these issues themselves.

* From a CSR perspective how should small countries like Mauritius position themselves in the global economy?

In general, small open economies often do very well when the global economy is expanding. But when the global trading system collapses -- or goes into retreat which it has done recently -- they're often left high and dry because capital tends to retreat from the periphery back to the economic centre. The result is that all the promised benefits and high expectations that have been raised among the populations of emerging economies are then dashed. Of course, there are always things that small economies like Mauritius can do to mitigate the impact of these developments, one of which is to think through the important question concerning the speed at which they should open up to the global economy.

* You’re saying that small economies should attempt to grow in ways that are manageable and sustainable. That’s very interesting because despite all the promises to the contrary that we have heard from some politicians and economists in recent years it’s abundantly clear that the business cycle is still very much with us.

Yes, that's right. Small economies need to take into account the economic cycle -- booms and busts, in other words -- although, of course, there will always be an understandable temptation when times are good to generate as much growth as possible. A lot of the countries of mainland Africa had huge expectations of growth because of the high commodity prices, especially for oil and minerals, in the 1960s and 70s which were not sustained and which sometimes led to social unrest. The key for all developing economies is not to close off to the global economy but to open up in a way that is -- how shall I put it? -- not too wide-eyed or innocent.

Nowadays it's also increasingly recognised that inward investment to small economies can result in dramatic changes both environmentally and socially. Small islands like Mauritius need to manage those impacts very carefully. Large-scale investment can be enormously beneficial in terms of wealth creation but it can also change the social structure in significant ways too -- relationships between the generations or relationships between the different ethnic groups on the island are obvious examples.

The good thing about companies that take CSR seriously is that they will have an understanding of the potential downside of their investments and take steps to mitigate the consequences rather than just let things happen and hope that the country's government will sort things out.

* Mauritius aims to more than double the annual number of tourists to 2 million by 2015 which seems to be very ambitious for a small island with a population of 1.3 million people. In my opinion, the big problem with an expansion of visitor numbers of this amount is that it runs a very real risk of damaging the high-end of the tourist market (which, at the moment, is highly profitable and employs a large number of people). If this happened any shortfall in revenue would presumably be filled by expanding the middle and lower segments of the market which would only add to the problem and cause further damage to Brand Mauritius. But how do you see it?

There is always a trade-off between maximising developments in the short term which might well lead to an erosion of environmental standards and cause problems of social cohesion which when combined will undermine the viability of the tourist industry in the long term.

The massive developments that have taken place in some parts of Europe -- Spain, for example -- involving high-rise developments and concreting over large parts of the countryside in order to get the tourist dollar have undoubtedly undermined the country's brand. In other words, if you go for growth in visitor numbers too quickly and in an unsophisticated way it will damage business in the long term.

I would say that the big question for Mauritius is: why do people come to the country at the moment? I'm sure it's not just the beautiful weather but it's also the countryside and the coastal areas which attract them. These things need to be preserved.

Another important point is that many tourists travel to Mauritius because the people are friendly. But I have been to places -- I'm sure you have too -- where tourism has corrupted the local culture to a great extent. It's made the people more cynical and a bit too keen to grab the cash from visitors. It’s the type of social pattern that develops over decades and while, of course, in the short term profits are going up at the same time the long-term attractiveness of the destination to visitors is weakened considerably.

* Another sector in Mauritius that is expanding rapidly is the financial sector. This area is likely to become more economically significant not least because China and India are increasingly defining the island as a service gateway to mainland Africa. The worldwide banking industry is in disarray but so far the sector in Mauritius has emerged relatively unscathed. What lessons can CSR provide for successful development in the financial sector?

I am sure that Mauritius can become an important financial centre. And examples from other parts of the world -- Jersey and the Cayman Islands, for instance -- suggest that financial services can make a huge contribution to the overall economy of small islands.

Really, there are two challenges related to corporate responsibility that I would make at a general level. First, it is important to ensure that offshore centres are not attractive because of lax regulation or because the government turns a blind eye to dubious practices. This is very important because global institutions are now very focused on rooting out corruption and lack of transparency in financial services.

But Mauritius seems to be doing very well in this respect having come top of the Ibrahim Index of African Governance for two years running. This accolade can only enhance its reputation. Indeed, a country like Mauritius which is seen as transparent is much more likely to attract longer-term capital from major global companies that want security of investment and which, at the same time, are also very keen to protect their own reputations.

Secondly, it is important that the wealth generated by the financial sector does not create social division or, at least, the social division that it does create is kept to an absolute minimum. In other words, expansion should be done in such a way that there should be little or no tension between those involved in the financial services sector and those involved in less well paid areas like agriculture and fishing, for instance. In other words, CSR tells us that community cohesion should not be sacrificed in the pursuit of profit.

* As we enter what looks to be a very serious economic downturn in the global economy do you think that many companies will be tempted to jettison CSR in order to protect their financial bottom line?

Yes, there will be a temptation to downgrade CSR -- budgets will be under pressure and that sort of thing. But there will be a risk in doing so. There has been a huge erosion in trust from both the public and politicians in big global companies which operate in the banking sector, for example. International banks have often been viewed somewhat sceptically but they are now being blamed for the collapse of the whole system. In many respects, the crisis is the outcome of the failure of ethics on the part of business and big banks, particularly in relation to their internal controls.

And I must point out that at least a few ethical investors in the US were raising questions about mortgage-backed securities a few years ago. Unfortunately, their voices were not loud enough and they were not heeded and the result has been that hundreds of billions of dollars of shareholder value have been wiped out in the last six months.

I think it would be a disaster if all the efforts to make big business ethical were discarded just because of the credit crunch -- particularly since it was caused by an ethical failure in the first place.

Dr Sean Carey is Research Fellow at the Centre for Research on Nationalism, Ethnicity and Multiculturalism (CRONEM), Roehampton University - A version of this article previously appeared in New Statesman