Development and analysis

Todays heightened interest in the proper role of businesses in society has been promoted by increased sensitivity to environmental and ethical issues. Issues like environmental damage, improper treatment of workers, and faulty production leading to customers inconvenience or danger, are highlighted in the media. In some countries Government regulation regarding environmental and social issues has increased, and standards and laws are also often set at a supranational level (e.g. by the European Union). Some investors and investment fund managers have begun to take account of a corporations CSR policy in making investment decisions. Some consumers have become increasingly sensitive to the CSR performance of the companies from which they buy their goods and services. These trends have contributed to the pressure on companies to operate in an economically, socially and environmentally sustainable way. It is important to distinguish CSR from charitable donations and "good works" (i.e. philanthrophy, e.g. Habitat for Humanity or Ronald McDonald House). Corporations have often, in the past, spent money on community projects, the endowment of scholarships, and the establishment of Foundations. They have also often encouraged their employees to volunteer to take part in community work thereby create goodwill in the community which will directly enhance the reputation of the company and strengthen its brand. CSR goes beyond charity and requires that a responsible company will take into full account the impact on all stakeholders and on the environment when making decisions. This requires them to balance the needs of all stakeholders with their need to make a profit and reward their shareholders adequately. A widely quoted definition by the World Business Council for Sustainable Development states that "Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large". (CSR: Meeting Changing Expectations, 1999). This holistic approach to business regards organisations as (for example) being full partners in their communities, rather than seeing them more narrowly as being primarily in business to make profits and serve the needs of their shareholders.

Corporate social responsibility reporting

The application of the principles of Sustainable Development through the introduction of a CSR policy is often accompanied by what is called triple bottom line reporting which declares not only financial results but also the social and environmental impact of the business. Some countries (e.g. France) have made such reporting mandatory. However the measurement of social and environmental performance is difficult and new measurement techniques need to be developed. Many large companies now produce annual reports that cover Sustainable Development and CSR issues, and these reports are often externally audited. But there is no common template for the reporting and the style and the evaluation methodology varies between companies (even within the same industry). Critics often comment that some of these reports are little more than spin and as an example note that Enron produced a glossy "Corporate Responsibility Annual Report" every year and that tobacco corporations such as BAT also produce social reports. The Global Reporting Initiative (GRI) is an attempt to standardize sustainability reporting and the AA1000 standard is an attempt to improve their legitimacy. The history of CSR reporting (an example in Germany) goes back to environmental and sustainability reporting.

The business case for CSR

The benefits of CSR to businesses vary depending on the nature of the enterprise, and are typically very difficult to quantify. A major meta-analysis has been conducted seeking to draw a correlation between social/environmental performance and financial performance. This article by Orlizty, Schmidt, Rynes 2002 which found that corporate virtue is likely to pay off in this sense. The business may not be looking at short-run financial returns when developing its CSR strategy, however.

The definition of CSR used within business can vary from the strict 'stakeholder impacts' definition used in this article and will often include charitable efforts and volunteering. CSR may be based within the human resources, business development or PR departments of a company, or may be given a separate unit reporting to the CEO or in some cases directly to the board. The business case for CSR within a company will likely rest on one or more of these arguments: Human Resources Corporate Social Responsibility can be an important aid to recruitment and retention, particularly within the competitive graduate market. Potential recruits are increasingly likely to ask about a firm's CSR policy during an interview and having a comprehensive policy can give an advantage. CSR can also help to build a 'feel good' atmosphere among existing staff, particularly when they can become involved through payroll giving, fundraising activities or community volunteering. Risk Management Managing risk is a central part of many corporate strategies. Reputations that take decades to build up can be ruined in hours through incidents such as corruption scandals or environmental accidents. These events can also draw unwanted attention from regulators, courts, governments and media. Building a genuine culture of 'doing the right thing' within a corporation can offset these risks. Brand Differentiation In crowded marketplaces companies strive for 'X Factors' which can separate them from the competition in the minds of consumers. Several major brands, such as The Co-operative Group and The Body Shop are built on ethical values. Business service organisations can benefit too from building a reputation for integrity and best practice. License to operate Corporations are keen to avoid interference in their business through taxation or regulations. By taking substantive voluntary steps they can persuade governments and the wider public that they are taking current issues like health and safety, diversity or the environment seriously and so avoid intervention. This also applies to firms seeking to justify eye-catching profits and high levels of boardroom pay. Those operating away from their home country can make sure they stay welcome by being good corporate citizens with respect to labour standards and impacts on the environment. Diverting Attention Major corporations which have existing reputational problems due to their core business activities may engage in high-profile CSR programmes to draw attention away from their perceived negative impacts. Thus British American Tobacco (BAT) will take part in health initiatives and the petroleum giant BP has installed very visible wind-turbines on the roofs of some petrol stations in the UK.

Critical points of view

Some critics of CSR, such as the economist Milton Friedman, argue that a corporation's principal purpose is to maximize returns to its shareholders, while obeying the laws of the countries within which it works. Others argue that the only reason corporations put in place social projects is utilitarian; that they see a commercial benefit in raising their reputation with the public or with government. Proponents of CSR, however, would suggest a number of reasons why self-interested corporations, solely seeking to maximise profits are unable to advance the interests of society as a whole. Key challenges to the idea of CSR include: - the rule of corporate law that a corporation's directors are prohibited from any activity that would reduce profits - other mechanisms established to manage the principal-agent problem,

such as accounting oversight, stock options, performance evaluations, deferred compensation and other mechanisms to increase accountability to shareholders. Because of this, it has become clear that a CSR activity generally can only be effective at achieving social or environmental outcomes to the extent that it maximizes profits: hence the CSR slogan - "doing well by doing good". Note that this requires that the resources applied to CSR activities must have a higher return than those resources could obtain if applied anywhere else, e.g. capital or productivity investment, lobbying for tax relief, outsourcing, offshoring, fighting against unionization, taking regulatory risks, or taking market risks - all of which are frequentlypursued strategies. This means that the possible scope of CSR activities is drastically narrowed. And corporations, with their constant incentive to maximize profits, often have identified all areas where profits could be increased, including those that have positive external social and environmental outcomes. The scope for CSR is thus narrowed to situations in which: 1. resources are available for investment 2. the CSR activity will yield higher profits than any other potential investment or activity 3. the corporation has been remiss in identifying this profit opportunity A conflict can arise when a corporation espouses CSR and its commitment to Sustainable Development on the one hand, whilst damaging revelations about its business practices emerge on the other. For example the McDonald's Corporation has been criticised by CSR campaigners for unethical business practices, and was the subject of a decision by Justice Roger Bell in the McLibel case (which upheld some of these claims, regarding mistreatment of workers, misleading advertising, and unnecessary cruelty to animals). Similarly Shell has a much publicised CSR policy and was a pioneer in triple bottom line reporting, but was involved in 2004 in a scandal over the misreporting of its oil reserves which seriously damaged its reputation and led to charges of hypocrisy. Universities and business schools, many of them with keen advocates of CSR amongst their teaching staffs, have themselves come in for criticism concerning their dealings with corporations. Critics of the role of business in society argue that:

Corporations care little for the welfare of workers, and given the opportunity will move production to sweatshops in less well regulated countries. Unchecked, companies will squander scarce resources. Companies do not pay the full costs of their impact. For example the costs of cleaning pollution often fall on society in general. As a result profits of corporations are enhanced at the expense of social or ecological welfare. Regulation is the best way to ensure that companies remain socially responsible.

Supporters of a more market based approach argue that:

By and large, free markets and capitalism have been at the centre of economic and social development over the past two hundred years and that improvements in health, longevity or infant mortality (for example) have only been possible because economies (driven by free enterprise) have progressed. In order to attract quality workers, it is necessary for companies to offer better pay and conditions which leads to an overall rise in standards and to wealth creation. Investment in less developed countries contributes to the welfare of those societies, notwithstanding that these countries have fewer protections in place for workers. Failure to invest in these countries decreases the opportunity to increase social welfare. Free markets contribute to the effective management of scarce resources. The prices of many commodities have fallen in recent years. This contradicts the notion of scarcity, and may be attributed to improvements in technology leading to the more efficient use of resources.

There are indeed occasions when externalities, such as the costs of pollution are not built into normal market prices in a free market. In these circumstances, regulatory intervention is important to redress the balance, to ensure that costs and benefits are correctly aligned. Whilst regulation is necessary in certain circumstances, over regulation creates barriers to entry into a market. These barriers increase the opportunities for excess profits, to the delight of the market participants, but do little to serve the interests of society as a whole.

Views Regarding CSR

Some would argue that it is self-evidently good that businesses should seek to minimise any negative social and environmental impact resulting from their economic activity. It can also be beneficial for a companys reputation to publicise (for example) any environmentally beneficial business activities. A company which develops new engine technology to reduce fuel consumption will be able (if it chooses) to promote its CSR credentials as well as increase profits. Some commentators are cynical about the true level of commitment of corporations to ideas like CSR and Sustainable Development, and their actual motivations for responsible behaviour. (Corporations that create the appearance of acting responsibly just for its public relations value are said to be "greenwashing.") Such commentators also say, citing Friedman's dictum, that the idea of an ethical company is an oxymoron, since the corporation is by its nature compelled to maximize its own interest, whatever the external price. Corporate executives and employees in turn have strong incentives to internalize the corporation's statutory obligations to maximize profits, sometimes to the extent that they abdicate their individual moral and ethical obligations as human beings. This tendency is, of course, encouraged by the desire to keep one's job, and by a system that judges and rewards performance strictly by bottom-line returns. The results of this tendency were clearly seen in the many corporate scandals of the late twentieth and early twenty-first centuries. So the CSR movement may perhaps be understood as an attempt not so much to regulate the activities of corporations per se, as to remind the people who constitute these corporations that they nonetheless have other responsibilities beyond the corporate ones.

Report No. 37379-GLB March 2007

Beyond Corporate Social Responsibility: The Scope for Corporate Investment in Community Driven Development
The last decade has witnessed expanded awareness among companies, especially multinational corporations, of their responsibilities toward the communities they impact, elaborated in the concept of Corporate Social Responsibility (CSR) and allied notions such as a Social License to Operate (SLTO). CSR is the realization of business contributions to sustainable development goals. It refers to how business takes account of its economic, social and environmental impacts in the way it operates maximizing the benefits and minimizing the downsides. CSR undertakings are the voluntary actions that business can take, over and above compliance with minimum legal requirements, to address both its own competitive interests and the interests of wider society. The business case

for investing in development, with mutual benefits accruing when communities become development partners rather than passive recipients of philanthropy, has become ever more persuasive. Factors that have motivated increased interest in private sector partnerships include a growing concern with the effectiveness of traditional development approaches, recognition of the impact of globalization and the increase of private capital flows into the developing world, and appreciation of the unique potential contribution of the private sector. The contribution from the private sector can be much broader than financial support, and include technical and managerial expertise, skill transfers and jobs, access to markets and business linkages. However, the results of private sector association in community development have been mixed, with few privatesector initiated projects achieving the promise of a comprehensive CDD approach. Shortcomings include companies lack of development expertise, reluctance to cede control of initiatives, imbalances in the power and level of organization between companies and communities, unsustainability of funding, and lack of capacity on the part of local actors, ranging from ineffective community based organizations to weak local government. There are two principal types of development partnerships between the private sector and communities: a Social Investment model wherein company funding is applied to investments or programs that seek to improve the general welfare of the community and an Economic Linkages model which associates development initiatives more closely with the business drivers of the private sector and includes job training, direct employment, technical skills training, microfinance, capital formation, or developing new supply bases and creating supply chain linkages. An economic linkages approach implies integration of community engagement strategies into the core business activity of the company and development of consolidated markets so that communities become embedded in corporate supply chains. This approach may provide the most promising outlook for CDD practitioners working to build sustainable and effective links between communities and the private sector. Integrating communities in an economic linkages framework requires capacity and institution building. Institutions of the poor are the vehicles
Potential Private Sector - CDD Partnership Models

Model Private Sector Social Investment: Indirect Investment

Private Sector Social Investment: Direct Investment Private Sector Social Investment: Community Foundation Economic Linkages Example Contribution to Social Fund Implementing projects directly with communities Corporate engagement through Community Foundations Supply chain integration, job creation Benefits Financial; allows companies to contribute without involvement; access to additional funds Can provide immediate development benefits Supports community-driven ethos; selfsustaining through endowment Sustainability; empowerment of the poor; transformation of society Risks Limited financial contribution; short-term; precludes contribution of non-financial assets Short-term; may create parallel governance structure Difficulty

transferring to communities; long timeframe; difficulty sourcing funding Subject to market risk; requires long timeframe; requires building of community capacity required to give the poor access to markets and, importantly, to enable communities to interact with the marketplace on more equal terms. There is a growing recognition among the business community that doing business with the poor cann develop into a viable business model. Debates have flourished under various guises, including work on investing in the Bottom of the Pyramid, Sustainable Livelihood Business or pro-poor business strategies. These approaches reflect a changing mindset around businesspoverty linkages that encompass: Treating poor people as consumers and business partners, rather than economically irrelevant beneficiaries; Reassessment of corporate price performance and functionality of products in order to meet the needs and means of new consumer groups, including the poor, and; Rethinking value chains and incorporating poor individuals and collectives as employees, suppliers or distributors.

Matching Corporate Drivers and Development Goals

The motivations for companies to develop CSR policies and invest in local communities vary from company to company, and industry to industry. Some companies are motivated more by reputation assurance needs or concerns around social licenses to operate, while others may be motivated by production and supply chain linkages, marketing and distribution issues. Extractive companies, because of their large social, physical, and environmental footprint, have an obvious powerful incentive to invest in their host communities. Company motivations to invest in communities can include, inter alia, philanthropy, legal compliance, mitigation of negative impacts, creating positive impacts, acquiring and maintaining a SLTO, guaranteeing sustainable supply bases, creating new market opportunities, and building good will/managing reputational risk. Often, poor communities are

marginalized from larger-scale economic activity and markets due to lack of access to capital and infrastructure, lack of bargaining power, lack of negotiation and basic business and accounting skills. These communities may have a variety of reasons to partner with private sector, for example: funds for development, community infrastructure development, mitigation of negative impacts of corporate operations, other development activities such as health, education, access to jobs and job skills training, training in/transfer of management skills, creation of new markets, and assistance with small business creation and access to microfinance.

Implementation and Impact of Corporate Community Investment

Potential outcomes of corporate community investment include: Enhanced brand image and reputation: community investment can open up new markets, reduce local regulatory obstacles, provide access to the local political process, generate positive media coverage and increase company or brand awareness within the community. Community investment as a strategic activity: companies increasingly look at community investment activities from a strategic perspective, defining themes that are aligned with core business objectives and taking advantage of core competencies. Combining philanthropic and commercial-community activities: more companies are applying a broader range of their business assets, along with philanthropic assets, to support community development. These might include cash contributions, non-cash assets (such as product donations and employee volunteer time), business relationships with local vendors and suppliers, local hiring and training programs, the siting of infrastructure and facilities, financial investments that benefit communities, and positive contributions to public policy issues that support community and economic development. Community-driven development: companies are investing in local capacity-building activities, and contributing to social and economic solutions to problems identified and defined by the communities themselves. In some cases, companies are working with local NGOs to build their skills to meaningfully engage, as company stakeholders, with the companies themselves. Creating partnerships: Partnerships with non-profit organizations, government agencies, suppliers, other companies, and their stakeholders are established to fulfill a wide variety of community and business needs.

Creating a global focus: As companies derive an everlarger share of revenue and profits from international operations, multinational companies are redefining "community," looking beyond local, domestic geographic communities to include those in regions where they own factories, or contract with factories operated by key suppliers. Measuring and reporting the benefits of corporate citizenship: Traditionally, corporate community investment was seen as goodwill and rarely tracked or measured. Increasingly, companies are measuring and reporting on the impact of their community investment.

Partnership Examples
CSR strategies have become increasingly more responsive to local stakeholders and to national policy and development agendas. Localization of CSR strategies implies shifts on several axes, including from supply chain to value chain models. Prevailing models of codes of conducts and certification schemes are top down and often maladjusted to weak governance structures and limited capacities in developing economies. Frontier companies are increasingly seeking to assess their footprint on society across their entire value chain in a more systematic fashion, enabling a deeper appreciation of where the company has relatively more positive and negative impacts on social and poverty concerns. An example of this type of initiative is the joint research of Unilever and Oxfam on the poverty impact of Unilever Indonesia1.
1 Exploring the Links between International Business and Poverty Reduction: A Case Study of Unilever in Indonesia, Oxfam GB, Novib, Unilever and Unilever Indonesia joint research project, 2005.

Other examples of progressive efforts around corporate-community partnerships include the Andhra Pradesh District Poverty Initiatives Project (APDPIP), a World Bank investment assisting the poorest of the poor in Indias northeastern state of Andhra Pradesh, covering 8 million rural poor families in 29,000 villages. The project supports mobilization and development of membership organizations of the rural poor and their capacity development to better save, access credit and undertake a range of livelihood enhancement activities in agriculture, livestock, the non-farm sector and services. Economically empowered communities of the poor have influenced banks, private corporations and the public sector to invest and work in their interests and have become immensely active in capturing opportunities at the bottom of the pyramid through franchising, retailing and product development and by developing community capacity and scale through federating community-based organizations at higher levels

or associative tiers. Community Foundations (CFs) provide a further example of public-private partnerships. CFs represent one of the fastest growing areas of philanthropy. They bring into alliance public and private sector, civil society and local communities and are proving to be a mechanism that directly addresses issues of importance to CDD, including financial sustainability of local initiatives, participatory planning, strengthening of local capacities and fostering of multi-stakeholder partnerships. CFs are grant making organizations governed by a board reflecting the communities they serve, that continuously mobilize contributions from a broad spectrum of predominantly local donors (individuals, businesses, local government, diasporas, etc.). They make it possible for a wide range of donors to create permanent, named component funds to meet critical community needs and engage in a broad range of community leadership and partnership activities, serving as catalysts, convenors, collaborators and facilitators. There are now several hundred CFs active in grant making outside of the USA and UK. CF corporate partnerships include those with the aluminum producer SUAL in Russia, the cell phone company Orange in Slovakia, Merchant Bank in Ghana and the platinum producer Impala Platinum in South Africa.

Future Work
Further work is proposed in the following areas: Community impact in the value chain and understanding of metrics of community impact along the value chain in major industry sectors; Understanding the institutional capacity of CDD programs to integrate in program design private sector production, distribution, retail and market issues. This may require a new skills set for community development practitioners, and; Facilitation of cross-sectoral and crossregional learning of successful CDDprivate sector initiatives and evaluation of the potential of local and national private sector companies to embrace CDD.
This summary is excerpted from World Bank Report No. 37379GLB, written by Daniel P. Owen. Additional copies can be requested via e-mail: socialdevelopment@worldbank.org