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Creating the Tipping Point towards Corporate Responsibility: Reflections on Meeting Expectations in the Global Economy

University of Notre Dame April 21-23, 2002

Sandra Waddock
Boston College
Carroll School of Management
Chestnut Hill, MA 02467
617-552-0477
617-552-0433
waddock@bc.edu

There is one thing stronger than all the armies in the world; and that is an idea whose time has come.
Victor Hugo

Has the time for a Global Compact that integrates business and social interests, is based on principles accepted by countries around the world, and asks companies to think beyond the bottom line in terms of their operating practices, actually come? In 1999, UN Secretary General Kofi Annan called upon global business leaders to create a 'global compact' in which companies agreed to live up to nine fundamental principles that, if fully implemented, would shape the world economy. Many people were and still are skeptical that business could or would live up to those commitments. Annan's words presented a significant challenge to world business leaders:

I want to challenge you to join me in taking our relationship to a still higher level. I propose to that you [corporate leaders] …and we, the United Nations, initiate a global compact of shared values and principles, which will give a human face to the global market.

Globalization is a fact of life. But I believe we have underestimated its fragility. The problem is this. The spread of markets outpaces the ability of societies and their political systems to adjust to them, let alone to guide the course they take. History teaches us that such an imbalance between the economic, social and political realms can never be sustained for very long. …

We have to choose between a global market driven only by calculations of short-term profit, and one which has a human face. Between a world which condemns a quarter of the human race to starvation and squalor, and one which offers everyone at least a chance of prosperity, in a healthy environment. Between a selfish free-for-all in which we ignore the fate of the losers, and a culture in which the strong and successful accept their responsibilities, showing global vision and leadership.
Kofi Annan, Secretary-General, United Nations,
challenging the 1999 World Economic Forum of
business leaders to form The Global Compact Kofi Annan, Business and the U.N.: A Global Compact of Shared Values and Principles, January 31, 1999, World Economic Forum, Davos, Switzerland. Reprinted in Vital Speeches of the Day, February 15, 1999, 65 (9): 260-261.

By the time the first US-based conference on the Global Compact was held in April 2002 at the University of Notre Dame, hundreds of companies globally had submitted letters of commitment to upholding the nine principles of the Global Compact. But the Global Compact had not yet reached a 'tipping point' Malcolm Gladwell. The Tipping Point: How Little Things Can Make a Big Difference. Boston: Little Brown & Company, 2000. where the nine fundamental principles articulated in it were considered essential to doing global business. Few of the 'signatory' companies were US companies, despite the apparent need for leadership by US companies to make the GC effective in the long run.

One of the unspoken questions underlying the Global Compact conference, thus, was the fundamental question: what will it take to create this tipping point for corporate responsibility especially among US firms? That is, what will it take to make managing corporate responsibility into what colleagues and I have elsewhere termed the 'new business imperative?' Sandra Waddock, Charles Bodwell, and Samuel B. Graves, Responsibility: The New Business Imperative, Academy of Management Executive, in press (May 2002). The issues raised at the conference by various participates suggest some of the transitions, corporate activities, and practices that are needed to create this tipping point. Below I will synthesize my impressions, from the meeting, of what these issues and practices are.

Many observers have argued that companies need to manage their responsibilities to stakeholders, to societies in which they operate, and to the natural environment, in much the same way that they manage quality, product/market development, and customer relationships. E.g., Sandra Waddock, Leading Corporate Citizens: Vision, Values, Value Added. New York: McGraw-Hill, 2002; James E. Post, Lee E. Preston, and Sybil Sachs. Redefining the Corporation. New York: Oxford, 2002. Of course, the seminal book on managing stakeholder relationships is R. Edward Freeman, Management: A Stakeholder Approach . Boston: Pitman, 1984. Using a framework for managing corporate responsibility developed in collaboration with Charles Bodwell of the International Labor Organization, the key issues facing companies that arose during the Global Compact Conference are developed below. The framework for managing responsibility used in this paper was jointly developed by me and my collaborator from the International Labor Organization, Charles Bodwell. See Sandra Waddock and Charles Bodwell, From TQM to TRM: Emerging Responsibility Management Approaches, Journal of Corporate Citizenship, in press (summer 2002). This framework, called TRM for total responsibility management, provides an outline of managing corporate responsibility that (as with quality management) can be applied within units, divisions, or even functions as well as across entire enterprises.

Analogous in many ways to managing quality, responsibility management involves three major processes: 1) inspiration , which combines creating a vision for the company's responsibilities that generates leadership commitment, identifying foundational values to which the company adheres, and stakeholder engagement; 2) integration the responsibility vision and values into the company's strategies, human resource practices, and management systems; and 3) developing innovation and improvement systems that remediate where necessary and create a learning environment for the enterprise, all based on a set of indicators that help the company measure progress toward its responsibility goals.

The Global Compact has the credibility and clout of the United Nations behind it. Its nine principles have been agreed upon by nations throughout the world. It is simple to understand and aspirational in its intent. As participants in the meeting suggested, its very simplicity works in its favor with respect to companies' willingness to sign on, even while its voluntary nature creates concern among actors in other sectors of society.

Inspiration

Creating a vision around not only the company's strategic mission and vision, but also its responsibilities as they relate to the principles of the Global Compact is a necessary first step for companies engaging in the GC.

Leadership Commitment. The 'inspiration' process of managing corporate responsibility involves getting top leadership (and others) committed to a responsibility vision. In the case of the Global Compact, this involves assessing the company's commitment to and leadership on the GC's nine principles. Several companies considering signing on or having already done so have created steering committees to investigate how the GC could become a sustainable element of corporate strategy and practices, while simultaneously providing guidance and oversight at the board of directors level. Top management commitment to the GC's principles is clearly essential for driving understanding about the importance of implementing the principles down into the organization.

Foundational Values. The very act of signing the Global Compact creates a sense of legitimacy for the foundational values, or what some call 'hypernorms,' Thomas Donaldson and Thomas W. Dunfee, Ties that Bind: A Social Contracts Approach to Business Ethics. Boston: Harvard Business School Press, 1999. embedded in the principles. Foundational values are those that are generally accepted throughout the world, as the GC's principles have been by the countries signatory to the declarations and conventions from which the principles are drawn. Foundational values create a baseline or floor below for standards, going below which can create ethical and reputational problems for the company. In recent years, there has been a proliferation of codes and standards and the GC has the benefit of codifying the most important values in a relatively simple framework.

Many companies have articulated their own core values, which provide guidance on decision making, strategies, and every-day practices. Several presentations highlighted the critical importance of the company's core values as they developed their responses to the GC. Particularly for companies in service or knowledge-based industries, integrity, trust, and cultural diversity play important roles in the company's success, for as a participant stated, 'people are our business. For this company, participation in the GC was the 'right thing to do.' It also, however, provided additional motivation to improve the company's performance because paying attention to anti-discrimination policies enabled it to build a more diverse client base served by a more diverse employee base, enhancing long-term profitability. ' Another company articulated that trust, respect, and fairness are our fundamental values, answering the question 'what do we stand for?' For this company, responsibility is 'not optional. You must be it' and find the sources of competitive advantage that arise from being responsible.

The GC's principles themselves can result in important dilemmas. For example, pharmaceutical companies struggle with the issue of providing access to medicine combined with the need for funding future research and current profitability. Other companies struggle with issues of living wage, diversity and harassment, noncomplicity with human rights abuses, and the precautionary approach (not principle) to environmental sustainability because of the commitments implied and their business implications. Further, some companies operate in countries where labor standards, such as freedom of association, are not permitted. If companies are to take the GC seriously—to mean it, as one participant said—these issues need to be resolved in ways that make continuing to do business feasible.

Stakeholder Engagement. Stakeholder engagement involves figuring out ways for the company to interact with key internal and external stakeholders. The engagement process allows companies obtain their opinions and inputs into corporate activities, and work collaboratively with them to ensure that mutual needs and interests are addressed, without the company's having to give up its own responsibility for strategic initiatives and business development. As one participant noted, this issue comes up particularly with respect to the long supply chains that companies today have evolved and creates a need for building awareness that external stakeholders may not differentiate between the company's and its suppliers' practices, especially with respect to the GC's principles. Initial reactions by executives may be that supplier practices are 'none of my business,' that avoiding cultural imperialism might dictate staying out of the suppliers' businesses, or that a pluralism of values globally exists that cannot be dealt with. By working with NGOs (and other stakeholders) that are willing to engage, some companies have found, however, that reasonable solutions to obvious dilemmas with no clear or straightforward solution can sometimes be found.

Integration

Involvement in the Global Compact means taking seriously the need to operationalize the principles into strategies and everyday practice, not just rhetorically articulate them. The key is to ensure that the principles go beyond rhetoric into practices that are known both from the top down and the bottom up.

Integration into Corporate Strategies and Vision. Making the GC principles real is a key concern of companies as they consider whether to sign on or not. As one corporate representative stated, it is necessary to make the principles 'part and parcel' of the company's purpose, as an 'owned' affair, rather than an add-on to existing activities.

Integration into Human Resource Practices and Systems. Among the key issues in the Global Compact are human and employee rights. Because employees are the stakeholders who actually carry out the company's strategies, they are critically important stakeholders. Principles such as the anti-discrimination principles (#6) make clear, as a conference presenter stated, that 'ethics count and are inseparable from doing business.' And as another presented noted, the reality is responsibility to employees and other stakeholders is important because 'core business practices have greater impact in the long run' than practices outside core business (e.g., charitable contributions).

Interestingly, as companies become involved in the GC principles, they sometimes find, as one participating company did, that the problems they had originally thought would be found in their supply chains are sometimes internal. In this situation, the issue was that of paying a living wage and the company found that it was not so much suppliers' employees that had the problem as the company's own custodial staff.

Integration of the Principles into Management Systems. The GC's principles lay out a set of standards and draw attention to issues, such as human rights, living wage, and freedom of association, that are not entirely familiar to management. Focusing on implementing the principles causes the company to pay attention to such issues.

Participants in the conference made clear that signing the GC principles is only the first step in a multi-pronged process of implementation. Not only is awareness building with respect to the principles needed internally, but also companies need to find ways to integrate the principles into management systems. Still, there is considerable uncertainty among participating companies about how to actually apply the principles in practice, particularly with respect to specific functional areas like research and development, marketing, and manufacturing. What was clear from the discussion was the complexity of the integration process, simply because of many companies size, geographic spread, structure, and product/market mix.

Innovation and Improvement

No company will ever be perfect. While the Global Compact establishes what amount to aspirational principles, it is, as a participant pointed out, inevitably likely that there will be a gap between the ideal and the reality of day-to-day practice. This gap creates the need for on-going efforts at improvement and learning, that is, for the establishment of a long-term process by which the company copes with problems and issues as they arise.

Indicators: Measuring and Assessing Progress on the Principles. Critical to the implementation of the voluntary Global Compact is the issue of measurement and monitoring progress toward achievement and implementation of the principles in practice. Issues raised around the credibility that companies have when they sign onto the GC hinge on the reliability and validity of implementation of responsibility goals toward the principles, especially in the eyes of employees and external stakeholders that include non-governmental organizations (NGOs) and customers. As one participant pointed out, as companies become more explicit about their own core values and raise expectations about living up to the foundational values inherent in the GC, they can create vulnerabilities for themselves that might not previously have been in public awareness. For example, many managers today are unaware of issues surrounding human rights or certain labor standards, especially deep within their supply chains. Adherence to GC principles raises up such concerns to top management, as well as NGO, attention and creates the potential need for external monitoring and verification of adherence to stated goals.

One issue that comes up for companies as they consider the GC is how to measure cost avoidance. Adherence to some of the principles can mean that certain problems are not experienced, e.g., NGO or consumer protests against labor practices, productivity problems that do not develop because employees are well treated, or environmental clean-up costs that need not be incurred. But, as a participant stated, 'cost avoidance is hard to measure.' Dealing with this issue effectively, very likely means rethinking corporate measurement systems and creating new standards for transparency and external accountability, as discussed in the next section.

Transparency and Accountability for Results. One of the implications of signing onto the Global Compact's principles may be that companies need to create considerably more transparent—and correspondingly credible—external reporting systems than many have today. With clearly stated principles and interaction with key stakeholders who hold the company up to the stated standards, comes anew level of accountability. Although may companies have recognized that NGOs and other activists are already holding them accountable—and publicizing transgressions widely—the visibility of signing onto the GC creates more impetus than ever for transparency. It is also the case that NGOs are not democratically elected and may represent a diffuse set of interests, thus creating a system that works will take time, engagement to build trusting relationships, and very likely a long-term process orientation.

Reporting standards for the triple bottom line of economic, social, and environment goals are just beginning to emerge. The major contender is the GRI, the Global Reporting Initiative. See: www.globalreporting.org. The GRI is attempting to create standards similar to generally accepted accounting principles (GAAP) for social and environmental reporting that are applicable on a global basis. As such reporting standards become better established, according to some participants in the conference, it is likely that NGOs will have more credibility in verification and monitoring than will the major accounting firms. It seems clear that some form of independent monitoring and verification system will be needed to satisfy corporate critics that companies are actually living up to their pledges.

Issues

Numerous issues associated with signing on to the GC—or not—were raised by participants. What follows is a brief explication of some of the issues raised during the conference.

Sustainability: One of the important things to come out of the discussion on the Global Compact at the conference was a shared understanding of the need to create a sustainable approach to managing and implementing the principles embedded in the Global Compact, thus sustainability is a key issue. The definition of sustainability that appeared to underlie the presentations and conversation at the meeting, however, is broader than the more typical usage in its environmental context. Companies themselves need to be sustainable and to engender sustainable relationships with key stakeholders, as well are recognizing the need to create more ecologically sustainable approaches to the use of environmental resources. This broad concept of sustainability was captured in the phrase used by one of the corporate participants recognizing that the company needed a 'societal license to operate' in order to be successful long term.

Credibility and Trust: Additionally, it was clear that companies considering signing were taking both the letter of commitment to the UN Secretary General that signals their willingness to participate in the Global Compact and the need to live up to the principles articulated very seriously. In part it seems that the credibility arises because of the UN's involvement in the initiative, putting the weight of international agreements behind the principles. In part, the seriousness comes because of the requirement for a letter signed by the CEO of the company, which puts the full weight of the company's own reputation behind the letter. In part, the seriousness rests on the reality that any signatory company's own credibility is at stake. Its stakeholders need to trust the company to stick to its work—and to adhere to the standards of integrity implied by the company's own core values, as well as the foundational values embedded in the GC. Stakeholder engagement or social dialogue is a needed part of the process for establishing trust and credibility among entities and individuals with differing perspectives.

Contract: Some companies raised concerns about what the signing the principles amounted to a contract , rather than a set of aspirations and goals. One of the risks perceived by companies, participants indicated, is that the GC principles will be interpreted literally or legalistically, especially by external critics of companies.

Visibility and Vulnerability. Signing on to the Global Compact creates leadership opportunities for companies, and generates a degree of external recognition. With this awareness of the company's stated commitment to uphold the GC's principles comes also a bit of vulnerability if the company does not live up to the standards. Issues of responsibility, accountability, and transparency are real when signing the GC, hence companies need to be aware of this source of potential vulnerability. Combined with the relatively lack of credibility of companies and the great degree of credibility of NGOs, some companies realize that getting 'out in front' on these issues creates not only leadership but also vulnerability. Recognition of this vulnerability may be why companies represented at the conference appear to be taking signing the letter to Kofi Annan as seriously as they are. At the same time, one participant noted that the GC's principles give NGOs a tool to go to non-signatory companies and ask 'what about you?'

Engagement with NGOs. NGO opinions on corporate responsibility are likely to carry more credibility than corporate opinions. Still, one of the points stressed at the meeting was that there are differences among non-governmental organizations that companies need to weigh when considering their engagement policies. Some NGOs are ideological and likely to be unwilling to engage in constructive conversations with companies, while less ideological NGOs may well be able to engage in fruitful collaboration. If constructive stakeholder engagement—or social dialogue—is in place, companies can learn from mistakes and problems, which will inevitably happen, rather than simply taking the heat from them.

Trade-off or Win/Win: The GC provides a framework for companies to move forward on meeting global standards, but many corporate leaders still believe that there is necessarily a 'trade-off' between being responsible and being profitable. Although considerable empirical evidence exist within both the social investment E.g., John B. Guerard, Jr. 1997. Is there a cost to being socially responsible in investing? The Journal of Investing . Summer, 6 (2): 11-18. See also Angel, J. J., and Rivoli, P. 1997. Does ethical investing impose a cost upon the firm? A theoretical examination? Journal of Investing, Winter, 6 (4): 57-61; and Sandra Waddock, Samuel B. Graves, and Renee Gorski. "Performance Characteristics of Social and Traditional Investments," Journal of Investing Summer 2000, 9 (2): 27-38. See also, David A. Sauer, The impact of social-responsibility screens on investment performance: Evidence from the Domini 400 Social Index and Domini Equity Mutual Fund. Review of Financial Economics, 1997, 6 (2): 137-149; J. David Diltz, The private cost of socially responsible investing. Applied Financial Economics ), April 1995, 5 (2): 69-78; Irene M. Herremans, Parporn Akathaporn, and Morris McInnes, An investigatio of corporate social responsibility reputation and economic performance, Accounting, Organizations, and Society , October/November 1993, 18 (7,8): 587-605; and Robert Heinkel, Alan Kraus, and Josef Zechner, The effect of green investment on corporate behavior. Journal of Financial and Quantitative Analysis , December 2001, 36 (4): 431-438. and corporate responsibility E.g., Griffin, J. J., and Mahon, J.F. 1997. The corporate social performance and corporate financial performance debate: twenty-five years of incomparable research. Business and Society , 36 (1): March, 5-31; Wood, D. J., &. Jones, R.E. 1995. Stakeholder Mismatching: A Theoretical Problem in Empirical Research on Corporate Social Performance. The International Journal of Organizational Analysis , 3 (3), July, 229-267; Pava, M. L., & Krausz, J. 1996. The Association Between Corporate Social-Responsibility and Financial Performance: The Paradox of Social Cost. Journal of Business Ethics, 15: 321-357; and particularly see the definitive study by Margolis, J. D., &, J. P.2001. People and Profits? The Search for a Link between a Company's Social and Financial Performance . Mahwah, NJ: Lawrence Erlbaum Associates; and their Misery Loves Companies: Shareholders, Scholarship, and Society. University of Michigan Business School Working Paper presented at the Academy of Management Annual meeting, Washington, DC, 2001. literatures to suggest that the more likely reality is that creating win/win scenarios, the 'trade-off' mentality still needs to be dealt with. Cases and examples, highlighted in the GC's website can provide further evidence that helps deal with this perception over time.

Transparency: The Missing Tenth Principle: One point noted at the conference was that there is a 'tenth principle,' an anti-corruption and transparency principle that is still missing. This principle was omitted because there was at the time of the GC's creation no universally accepted declaration against corruption, however, the UN realizes the need for such a principle. When the declaration or convention is accepted, it will be included in the Global Compact.


Toward the Tipping Point?
It was clear from both the participants in the conference and the conversation that the Global Compact had not yet reached a 'tipping point' in the United States at the time of this conference. Yet it was equally obvious that there is considerable corporate interest in the Global Compact and the principles that it stands for, particularly as the fundamental question with which the GC deals continues to be raised. That question, as articulated at the conference, is 'What is the appropriate distribution of responsibilities in society?' Businesses, governments, and civil society organizations, representing different points of view, are all involved in this determination, and in making responsible corporate practice, as articulated by the GC's principles, an integral part of doing business not just in the good times but in every time period.

It was also clear that signing on to the Global Compact is merely the first step in what amounts to an unending process of continual learning and improvement. Summarizing one participant's remarks, this is not a program. It's a process. It has a beginning, but no end. It can help people make good decisions, share learning across businesses and regions, build trust and commitment through team-based action learning, and empower locals to take ownership and accountability for their decisions. As an organization, the Global Compact is young and still learning and evolving.

More conversations like the one at this conference are probably needed as the tipping point is approached. Thinking back to the analogy to quality management, made at the outset of this short paper, we might take a lesson from that 'movement.' What 'tipped' quality into becoming the business imperative that it is today? Arguably, it was pressures from a combination of sources that created the tipping point. For example, competitive pressures (e.g., Japanese competition), social pressures (e.g., consumers demanding better quality), education and information (e.g., the NBC White paper of the late 1970s "If Japan Can, Why Can't We?"), and companies requiring suppliers to adhere to quality standards (e.g., ISO's quality standards) created momentum for quality.

A similar set of pressures exists today that are driving corporate responsibility to potentially become a business imperative in the future. See Waddock, Bodwell, and Graves, 2002, in press. Imagine a world in which major corporations that had signed onto the Global Compact required their suppliers to also do so. Imagine that companies doing so developed systems of stakeholder engagement for which they were willing to be held accountable, as the AA 1000 framework advocates, See: www.accountability.org.uk. and required their suppliers to do so as well.

Imagine that they similarly adhered to the labor standards of the GC with measurement and internal accountability systems resembling those developed by Social Accountability International in its SA 8000 standards See: http://www.cepaa.org..--and required suppliers to do so as well. And imagine further that external verification and monitoring could be assured through accountability and transparency standards reporting mechanisms like those under development by the Global Reporting Initiative. See: www.globalreporting.org. Such a scenario, of course, requires the leadership of major firms, their willingness to hold themselves accountable—and be accountable to their stakeholders for the major impacts of doing business. A hard road, perhaps, but possibly a better road to go down voluntarily than be forced down it by activists', customers', and social investors' demands for transparency.