Jane Nelson on Corporate Social Responsibility

Interviewed by Molly Lanzarotta on February 9, 2006

Over the past decade, corporate social responsibility (CSR) has become an increasingly topical subject, but there is a wide diversity of opinion as to what CSR actually means. Jane Nelson is director of the Corporate Social Responsibility Initiative, which is sponsored by the Kennedy School's Mossavar-Rahmani Center for Business and Government, Center for Public Leadership, Hauser Center for Nonprofit Organizations, and Joan Shorenstein Center on the Press, Politics and Public Policy.

Nelson's research is focused primarily on understanding the structure and effectiveness of collective business initiatives and multi-stakeholder partnerships, especially in the realms of public health and economic development.

Q: How is CSR being defined for your research program at the Kennedy School?

: We look at three core components of corporate social responsibility. First and foremost we define it as how companies manage and account for the core impact of their central business activities-their workplace practices, impact of their products and services, how they manage relationships, and impacts along their value chains and their supply chains.

Secondly, we look at CSR from the perspective of corporate philanthropy and community investment. There's a tendency to define CSR only in terms of philanthropy, and although it's important, we just see it as one element-although one that is becoming increasingly interesting in terms of strategic philanthropy, social venture capital and growing investment by large companies in social enterprises.

Thirdly, we look at how companies interface with public policy dialogues and influence public policy.

So for us CSR is fundamentally about how companies manage their core business, their philanthropy, and their engagement in public policy dialogue.

Within our research program we're looking at two key components of CSR. First of all, we try to study and understand governance and accountability mechanisms both within companies but also external to companies, which improve the measurement, the monitoring, and the reporting of a company's non-financial performance-its social and environmental, and broader economic performance. And the second component we're looking at is how companies engage with nonprofit organizations, other businesses, government entities, and multilateral development agencies to address challenging public problems such as healthcare, climate change, and HIV/AIDS, that no one sector can address on its own. So the focus is both on governance and accountability mechanisms and new partnership models to solve public problems.

: What are some of the key drivers that have influenced the growth in CSR over the past decade?

Nelson: There are seven drivers that are worth looking at. First is the growth and the reach of the private sector in general as a result of trends like globalization, market liberalization, privatization, technological innovation. We've seen a massive growth around the world in private enterprise. The UN estimates, for example, that in 1990 there were about 37,000 multinational corporations. Today, it estimates there are well over 70,000 multinational corporations, with their affiliates having gone from about 170,000 to well over 800,000 around the world, with millions of small and medium-sized businesses operating along those supply chains as well. So there's been growth in the reach and influence of the private sector and with that, new opportunities for business, new rights for business, but also, a whole range of new risks and expectations of the private sector.

Secondly, there has been a crisis of trust in the private sector, primarily driven by corporate governance and ethical scandals-the Enrons and the WorldComs of this world-but also by a decline in trust in established institutions in general. So corporate leaders increasingly have to respond to that and rebuild trust.

Third, we've seen a dramatic growth in the number, influence and sophistication of non-governmental organizations, campaigning groups, and activist organizations. Something like a hundred new non-governmental organizations are created, just in the U.S., every day. They have unprecedented communications capacity and connectivity, obviously through the internet, but also through the global media, and with that an ability to profile and spotlight corporate malpractices and raise these to public attention.

A fourth driver, linked to the others, is the growing financial clout and activism of large institutional investors. This growing investor activism is especially apparent in the area of corporate governance, but is also increasing in response to growing recognition among investors of the financial and strategic risks for certain industries posed by trends such as climate change and growing obesity.

I think another major driver comes from governance gaps. There are gaps in the sense of constraints in public sector capacity and finance to deal with some of the very complex issues governments face. Linked to that, particularly in developing countries, there are challenges of weak governance and, in some cases, bad governance ranging from high levels of corruption to repressive regimes and failing states. For large corporations operating in these economies, especially in the extractive sector, there's growing pressure from different stakeholder groups for business to fill some of these governance gaps. So the changing nature of the public sector, its capacity constraints and shifting priorities are having a big influence on what's expected of business.

Another key driver has been growth in the importance of intangible assets as a key driver of corporate value, things like reputation, innovation, stakeholder relationships. With this growth, companies can't afford some of the reputation risks associated with NGO campaigns and so are more aware of addressing these risks than they might have been in the past.

Finally, we've seen the emergence of what Kofi Annan, the Secretary-General of the United Nations, describes as 'problems without passports': climate change and HIV/AIDS are two obvious global challenges which no one sector, indeed, no one nation can address on its own. Not only activists, but also governments and other stakeholders are increasingly looking to the private sector-which has global reach, influence, and resources-to play a role in helping to address some of these complex problems. And the big challenge is, what is that role? What are the appropriate boundaries of business vis-à-vis government?

Q: Which leads us to our next question: a key focus of your research is on the role that the private sector plays in supporting solutions to international development challenges. Has this role changed in recent years? If so, how and why?

One of the main changes has been growing acceptance and recognition within the international development community itself that economic growth and private enterprise have a central role to play in ensuring effective development outcomes. We've seen in the past five years a number of seminal reports-including the UN Commission on the Private Sector and Development's report ‘Unleashing Entrepreneurship', the 2005 World Bank Development Report ‘A Better Investment Climate for Everyone', and the Commission on Africa report led by the British government-all focusing on the fact that the private sector is a critical component of effective development solutions. So I think there's been a general increase in awareness of the importance of business, accompanied by growing investment in developing countries by multinational corporations- European, American and Japanese multinational corporations-but increasingly also 'south-south': Indian multinationals investing elsewhere in Asia, South African multinationals investing elsewhere in Africa, and Chinese companies starting to invest in Africa.

Just from a U.S. perspective, the United States Agency for International Development (USAID) estimates that in the 1990s, about 70 percent of capital flows from the U.S. to developing countries was in the form of public official development assistance, whereas today, over 70 percent of those capital flows are private capital flows, in the form of, primarily, foreign direct investment, but also foundation funding, remittances from people living here in America sending money home, corporate philanthropy, church groups and nonprofit organizations.

Within this changing context, there are three particularly interesting areas of innovation that we are witnessing. First of all, the emergence of new commercial business models at the level of individual companies. One of the most popular areas of analysis and discourse at the moment is focused on what people are calling the 'bottom of the pyramid,' new business models whereby companies are trying to serve and develop markets at the bottom of the economic pyramid among very low-income consumer groups. Examples are banks improving access to finance, especially micro-finance, or consumer companies developing products that low-income communities can actually afford, or information technology being made more available to low-income communities. In short, we're seeing new commercial business models evolving through which companies are getting engaged in addressing development challenges.

I think a second interesting area of innovation is the emergence of new 'hybrid-models' where you've got a combination of corporate philanthropy or social investment with core corporate competencies and assets aimed at addressing development challenges-health, education, or access to credit-where they're not fully commercially viable, but have the potential of becoming commercially viable over the long-term. Basically, philanthropic funding is being harnessed as social venture capital and seed funding, which is a very new way of looking at philanthropy. Often you see these kinds of initiatives being done in partnership with nonprofit organizations, private foundations, social enterprises and government.

Finally, at a more systemic level, there is the emergence of new collective business alliances and multi-stakeholder or public-private partnerships, bringing together groups of companies and sometimes other actors around particular development challenges that no one individual actor can address on its own.

Q: How can responsible business practices best be fostered?

: I think there are a number of ways to foster responsible business practices, both through the so called carrots and sticks, as it were. First and foremost, government is absolutely essential. There's a growing debate in the CSR community that corporate social responsibility is all about voluntary action, and to a certain extent this is true, but I think that voluntary action happens within the context of governance and government. And I think that the work of government is absolutely essential in fostering responsible business practices. And by that I mean not only command and control regulation, but a whole range of regulatory instruments that governments have at their disposal: fiscal incentives; disclosure requirements; procurement requirements. Governments both in the United States and internationally are obviously major procurers of products and services from the private sector, and actually implementing social and environmental criteria and ethical criteria into procurement contracts is another way governments can play a role. So it goes, I think, far beyond regulation, although that is also absolutely critical. I think governments are a key driver and enforcer of responsible business practices and need to continue to be so.

But what we've seen is the emergence of other stakeholder groups that also have a growing influence on fostering responsible practices. In a world where corporate reputation is very important to a lot of companies, NGOs and the media play a very important role in highlighting bad practices, but also in recognizing and highlighting good practices.

Another area that has growing importance in fostering responsible practices is certification schemes and market-driven mechanisms which are not driven by any individual company but are collective initiatives. One example is the Marine Stewardship Council that has set up a certification program for sustainable fisheries, and more and more fish producing companies and retailers are signing up to these certification schemes. These provide a market mechanism and an information mechanism through which consumers can make choices about whether they're going to purchase sustainably and responsibly produced products or not.

The final thing that I think fosters responsible business practices is the values of business leaders themselves. These are reflected in the culture and behavior of individual firms, but also in some of the voluntary initiatives that are emerging, where business leaders are coming together in a collective manner. Although they're only voluntary and you have the problem of free-riders and laggards who don't participate, I think they are an important mechanism for driving good practice.

A final point from a research perspective is responding to the question that a lot of people ask: 'Why is the CSR initiative at a school of government?' Much of CSR is a response to governance gaps or failures. As such, I think one of the most interesting research avenues for us to explore is the interface between business and government-both at the national level and on a global basis. As the roles, responsibilities and expectations of business shift, much the same is happening with government. There is a need for more research to better understand these trends-in particular, their implications for the appropriate boundaries between the roles of the public and private sectors, the pros and cons of voluntary versus regulatory approaches to shaping corporate behavior, and the effectiveness of the many new public-private partnerships and multi-stakeholder mechanisms that are emerging to solve complex public problems.

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