Corporate social responsibility (CSR) is a booming business in Latin America. Major companies like the Chilean copper giant Codelco and the Brazilian energy multinational Petrobras proudly use their environmental stewardship and good labor practices to demonstrate that their corporate operations are aligned with social goals. Across the region, Latin American firms are making social investments in education, health, and community development.
Yet corporate Latin America still trails behind Europe and the United States. Only 93 of Latin America’s top 500 firms participate in the European-based Global Reporting Initiative, the cutting-edge international benchmarking exercise that sets the global standard for CSR—and 40 of those companies are from just one country: Brazil. Only 12 Latin American companies are members of the prestigious World Business Council for Sustainable Development.
Since regional corporate CSR reports often lack hard data certified by independent experts, there is a strong suspicion that many companies are spending more energy advertising their new “greenness” than in undertaking rigorous assessments of their environmental management systems. Too many firms appear to be printing more words lauding their philanthropic generosity than expending hard cash on local communities. Certainly, too few Latin American executives actively reach out to civil society leaders, labor leaders, or environmental NGOs in formulating their CSR programs.
There is, in short, a yawning gap in Latin America between the promise of CSR and the reality. Ultimately, the CSR concept has the potential to transform the business climate, bring regional management-labor relations into the 21st century, place Latin America on a sustainable development path and make a measurable difference in poverty reduction. But there is still a long way to go before professed aspirations match tangible results. Governments and the private sector must together re-examine the frameworks that determine how individual firms perform their CSR practices. If governments were to give firms stronger, clearer incentives, there is every reason to believe that private companies will respond with vigor.
A number of powerful drivers—global, regional, and local—have spawned the rising interest in CSR in Latin America.
Increasingly, Latin American exporters must seek certification by global brands or by transnational activist organizations which monitor their activities. Companies such as Home Depot, Chiquita Brands and Levi Strauss dispatch auditors worldwide to ensure compliance with their internal codes of conduct. Latin American firms operating in global supply chains have to meet the same high-quality standards if they are to retain access to international markets.
Arguably, these market-based pressures are having at least as much of an impact upon on-the-ground compliance as might occur through the alterations in national labor laws and in sanctions procedures that the U.S. Congress has demanded within free trade agreements. In fact, many Latin American labor codes were developed in the mid-20th century, when labor unions were at their zenith and experts from the International Labor Organization helped draft local legislation. The critical shortcoming is inconsistent enforcement. Ministries of labor are woefully understaffed, labor judges are over-taxed, and businesses can too easily purchase the silence of underpaid officials. But image-conscious global brands cannot risk the glare of discovery of unpaid wages or child labor. International corporations have blanketed Latin America with auditors scouring factories for violations of recognized labor standards.
Since the mid-1990s, Latin American corporations have received advice and encouragement from prominent U.S. foundations like Kellogg and Ford, as well as leading pro-CSR corporate groups such as the San Francisco-based Business for Social Responsibility. But there are other motivations, closer to home, driving CSR in Latin America. Democratization has freed civil society organizations and mass media and emboldened feisty politicians to call the private sector to account. Throughout the hemisphere, the private sector can no longer count on friendly authoritarian governments to protect their interests; instead they must more openly engage in the tussles of democratic politics and the marketplace of ideas to advance their collective interests.
Corporate social responsibility is also a response to the evident inability of governments to meet pressing social needs. With limited ability to tax, and facing massive social deficits and demographic explosions in already over-crowded labor markets, Latin American governments cannot supply all of the social programs and other public goods that their populations expect and demand. In Latin America, smart corporate leaders recognize that democratic stability depends upon satisfying these social needs, and the private sector has a role to play in filling some of the empty spaces left by under-funded and over-extended government agencies.
A growing number of Latin American firms arealso buying the narrower business case for CSR—the so-called win-win-win of the “triple bottom line.”
Firms that reduce their energy consumption and recycle waste products cut costs and earn unexpected revenues. Firms that honor health and safety standards keep medical costs down, and well-treated workers are likely to be more productive. In some markets, human resource departments are aware of other benefits: firms with reputations for high-quality CSR are more attractive to socially-aware business school graduates and are better able to retain quality personnel. “Net Impact” associations that bring together thousands of young MBAs seeking to employ their business skills to make a positive impact on society are already active on many business school campuses.
Expanding the Stakes
Another concept underpinning modern CSR is the expanded stakeholder theory. Pre-CSR, firms had one simple goal—to maximize shareholder value, or in the Latin American case, the net income of the reigning family patriarch. Under CSR, firms still pursue profits while also taking into account the diverse interests of other stakeholders: managers, employees, customers, suppliers, local communities, and interested civil society organizations. If the firms’ reach is wide enough, they must factor in the welfare of whole nations and even the entire planet. Some notable examples are CEMEX of Mexico, Embraer of Brazil, Polar of Venezuela, and the Pellas Group of Nicaragua.
The expanded stakeholder theory coincides with the more demanding democratic politics facing the Latin American private sector. To re-brand its reputation and strengthen its political standing among multiple stakeholders and democratic constituencies, enlightened business leadership is embracing corporate social responsibility.
Most Latin American countries now have active national CSR associations. The hemispheric network Forum Empresa, groups 22 CSR organizations from 20 countries with 3,500 member firms. Moreover, 725 Latin American companies are signatories to the United Nations Global Compact (a voluntary initiative whose signatories self-report on their adherence to ten universal principles in the areas of human rights, labor, the environment, and anti-corruption). These hefty memberships are clear signals that, in principle at least, CSR is gaining acceptance in Latin American business circles.
Moreover, leading Latin American firms—domestic and foreign-owned—have pioneered innovative social investments [Editor’s note: as examples please see the case studies sprinkled throughout this issue].
National CSR associations such as the Ethos Institute in Brazil and Fusades/Fundemas in El Salvador have well-deserved international reputations for innovative social entrepreneurship. In late 2005, the Brazilian stock exchange launched an “Index of Business Sustainability” which now lists 34 companies screened for good social responsibility.
Yet few regional firms publish stand-alone social responsibility reports, and many continue to equate social responsibility with traditional philanthropy and family charities. Not surprisingly, opinion surveys suggest scant public knowledge of CSR beyond well-publicized but isolated initiatives of particular firms. Few Latin Americans would credit CSR as contributing significantly to the broad national social agendas. So far, CSR has not materially improved the rather tarnished image—only marginally better than that of political parties—of private sectors in Latin America.
Various studies point to a number of reasons why Latin American firms are not fully exploiting the opportunities that CSR offers for their businesses and communities. Probably the leading factor is confusion with regard to CSR itself—still a new concept to many executives—who are left wondering just what is expected of them or how to set priorities among CSR’s growing list of agenda items. Many firms remain un-persuaded of the business case for CSR: can they be sure that the expected returns will exceed the extra costs? Other executives support CSR in principle, but feel that their firm is too small to affect larger social problems. A further complication is that CSR reporting is still largely superficial, so few business leaders know what their counterparts are doing in the field.
And finally, public pressures on firms to adhere to CSR principles vary greatly across companies. Many executives decide it’s wiser to keep their heads down and hope that the “pesky” NGOs focus their harsh publicity on firms whose high public exposures render them more vulnerable to attack. Firms conclude that since external monitoring—whether by business associations, governments or NGOs—is generally spotty, it’s more prudent to maintain a low profile.
In fact, government can play an important role in making it possible for corporations to act. While CSR emphasizes the “voluntary” nature of private-sector actions and activities, governments can create the incentives to encourage CSR-consistent behavior that advances the public interest. There are already important precedents: Costa Rica’s Certificate of Sustainable Tourism rates hotels on resource management; Peru’s Programa Minero de Solidaridad con el Pueblo matches public funds with social investments by over 40 mining companies; Brazil’s Zero Hunger campaign enrolls private firms in providing nutrition to needy citizens; and USAID’s Global Development Alliance (GDA) forges public-private partnerships worldwide. For example, in Central America, GDA brings together governments, international brands, local factories, and non-governmental organizations to raise labor standards in textile and apparel factories.
However, CSR’s potential is still not readily apparent to key players around the hemisphere. For the Bush administration, government promotion of corporate social activism poses ideological issues. As then White House strategist Karl Rove told the author, “It’s fine for the private sector to voluntarily pursue CSR, but those should be market-based decisions.” At the other end of the spectrum, orthodox leftists and some labor leaders regard CSR as an encroachment on public-sector or union responsibilities, or denigrate it as corporate propaganda.
Making CSR Matter
CSR is as important to hemispheric governments (other than those dedicated to demonizing imperialist corporations) as to the private sector: both share an interest in promoting democratic stability and mitigating social pressures through poverty alleviation. CSR offers governments additional resources to pursue their core goals. In addition to financial resources, management skills, and technical expertise, private firms often have more information—about project-level environmental trade-offs, labor market demands, and global supply chains—than the public sector can amass on its own.
Here are some initiatives that hemispheric governments should take, individually and collectively, and in close cooperation with national CSR associations and multilateral institutions, to encourage high-quality CSR.1
1: Provide guidelines and incentives for high-quality annual reporting.
Working closely with national CSR associations and other stakeholders (including knowledgeable civil society and labor organizations), governments should help set voluntary reporting standards that conform to international guidelines, notably to the UN Global Compact and the Global Reporting Initiative (GRI), with its more detailed sector-by-sector guidelines. Also relevant would be existing industry-driven codes that govern production in global supply chains in various sectors (electronics, forestry, footwear, toys, cocoa, coffee, etc.). To promote dynamic flexibility and continuous improvement, and to allow the best firms to maintain reputational advantage, quantitative benchmarks can be raised gradually over time.
The clarification of reporting standards would help to remove the confusion and ambiguities that have inhibited CSR, especially among medium and small firms. Incentives can vary from issuing national awards to top performers to conditioning operating licenses or access to certain preferential government programs on conformance to consensual standards.
More transparency in reporting would have another big pay-off: consumers, citizens, and communities would become much more aware of CSR standards and practices. High-quality, credible reporting would translate into high-impact advertising. Eventually, firms would compete among themselves to showcase their responsible internal management practices and their extensive social commitments.
Firms and the publics they serve would have more confidence in national reporting standards if they were compatible across the Americas. As more Latin American firms engage in multiple regional markets, consistency of standards would simplify regional business integration. Harmonization of standards could be pursued by networks of national CSR associations, but for reasons of national pride and mutual distrust, it is likely that a strong trans-national forum, such as a multilateral development bank, will have to assist.
Logically, firms would finance their own reporting and evaluations, as they do in traditional financial reporting. At the outset, governments and multilaterals could provide an infant-industry subsidy to allow firms to gain knowledge and confidence in the process.
2: Promote rigorous independent evaluations of CSR reporting.
Reporting guidelines should encourage self-evaluation of CSR efforts. Inevitably, however, self-reporting raises questions of objectivity. Governments can encourage independent evaluations—as can national CSR associations—of compliance with environmental standards, ethical labor practices and community investment projects.
Governments and multilateral banks can also provide capacity-building for independent social auditing firms, including start-up funds, training and certification. The goal should be to create a market of CSR auditors, just as there is for accounting firms that audit financial statements. Over time, the more successful certification firms will upgrade to the trans-national level, gaining in credibility and disseminating best-practices along the way. Eventually, no firm will consider issuing a social audit without an external review, just as today no public company would issue an annual financial statement without an independent audit.
3: Encourage firms to fit their social investments within larger policy frameworks.
National social programs or the UN-sanctioned Millennium Development Goals (MDGs) can provide macro frameworks to orient CSR investments. In some cases, government agencies—national, provincial, municipal—can engage private companies in formal public-private partnerships, enabling firms to better leverage their sources and participate in larger projects. By contributing to macro goals, firms can overcome their isolation and better see how their corporate programs are making a strategic difference.
Endorsed in 2000 by 189 governments including the 35 Western Hemisphere states, the MDGs set 2015 as the deadline for success. The eight goals and 18 sub-targets include such quantitative, country-specific objectives as reducing extreme poverty by 50 percent, reducing by two-thirds infant mortality, and ensuring universal primary education. Goal Eight, “Develop a global partnership for development,” includes two sub-targets addressed specifically to the private sector: “In cooperation with pharmaceutical companies, provide access to affordable essential drugs;” and, “In cooperation with the private sector, make available the benefits of new technologies, especially information and communications technologies.”
Implementation of the MDGs in the Western Hemisphere is being closely tracked by various multilateral development agencies. As might be expected, progress has been mixed, both across countries and targets. To help guide corporate social investment, governments with the support of the multilateral agencies should produce matrices that cross the remaining implementation gaps with the known projects—public and private—that are addressing the targeted needs. Thus, each private firm could search through the matrix and match its interests and expertise within the MDG gaps.
For example, pharmaceutical and food firms could pinpoint health goals while makers of cement can address shortages in schools and housing. Firms could also search out partnerships with listed public agencies and other private firms laboring in the same vineyards. Participating firms would welcome the wider public exposure and implicit official benediction of their good works. Already some global firms, such as Petrobras and Nestlé, align their activities to MDG targets in their own social reporting.
4: Set quantitative voluntary targets for social investments—up to one, then two percent of earnings.
In the United States, large firms invest an estimated one percent of pre-tax profits in corporate philanthropy (separate from what individual executives or large shareholders might donate on their own accounts). There are no comparable figures for Latin America, although it is a safe guess that the numbers are lower. Imagine if the hemisphere’s governments, in concert, were to urge larger firms (say, those with over 500 employees, whether domestic or foreign-owned), on a voluntary basis, to invest 1 percent of their pre-tax profits on social programs—and to gradually raise their sights to 2 percent!
Governments should offer to assist participating firms in aligning their contributions to broader social programs. The firms will gain by increasing their leverage, efficiency, and triple-bottom line (financial, social, environmental) rates of return. Over time, corporate contributions will amount to many billions of dollars. Some might protest that such public appeals to private firms would be equivalent to an informal tax, but the critics would be wrong: firms would retain control over their social expenditures, and be able to link them to their own corporate investment and marketing strategies.
There is a precedent for encouraging corporate investments through public target-setting. In Great Britain, since 1986 the top corporate CSR association, Business in the Community, has set the standard of 1 percent of pre-tax profits as a target for community investment. In 2006, 179 companies publicly reported their ratios and absolute amounts of giving: the median ratio was 1.63, total giving reached nearly one billion pounds.
To maintain credibility, Latin American governments should establish benchmarks for socialaccounting, just as they do for tax-free philanthropic contributions. In measuring corporate philanthropy, firms typically report not only financial donations but also contributions in kind, such as volunteer staff time and equipment transfers. But firms should not be allowed to over-price products nor claim credit for purely commercial expenditures with no special social purpose. Ideally, governments should cooperate to harmonize such social accounting standards.
Available evidence suggests that multinational firms bias their social investments toward their home markets: according to the Committee Encouraging Corporate Philanthropy, U.S. companies earning over 40 percent of their revenue abroad allocated only 15 percent of their philanthropy budgets internationally. Developing countries ought to be annoyed, since they are receiving in social investment a lesser percentage of corporate profits. Hemispheric governments—including the U.S. and Canada but also Mexico, Brazil, and Chile—whose top firms invest globally, could issue a dramatic call: the one-two percent voluntary targets would also apply to subsidiaries, and firms should report these country ratios in their annual social responsibility reports.
5: Align corporate public-policy lobbying with CSR policies.
Too many firms in Latin America press for taxes so low that governments can’t hope to erase social deficits (or attain the MDGs). Too many powerful firms seek to capture regulatory mechanisms to undermine market competition, to the detriment of clients and consumers. Too many Latin American firms behave as though compliance—not just with CSR but also with national laws and regulations—is voluntary. Such behavior opens the whole CSR movement to accusations of hypocrisy and corporate white-washing and undermines the broad strategic objectives of CSR.
In truth, many U.S. and European firms that champion CSR are open to the same criticism. To address such self-destructive contradictions, reporting requirements should include information on corporate lobbying—not just amounts spent but also positions advocated. Stakeholders could then judge whether firms’ CSR departments are isolated or integrated into mainstream management operations and strategic planning.
6: Encourage Private CSR Associations To Pioneer These Initiatives.
Optimally, national CSR associations, collaborating through their umbrella organization, Forum Empresa, will pioneer many of these initiatives. Private firms have more confidence in their own organizations. Yet collective action problems, uncertainties about outcomes, resource constraints, and short-term horizons may inhibit private initiatives—which are why governments exist in the first place. But even where states must initiate action, CSR associations and interested private firms should be highly visible and fully engaged.
Each government can decide for itself how best to coordinate its various CSR initiatives, but intra-governmental coordination is vital. A 2005 study by the U.S. Government Accountability Office (GAO) found that over 50 federal programs (albeit often very small) in 12 agencies—ranging from the Overseas Private Investment Corporation (OPIC) to the Inter-American Foundation—support CSR-related activities.2 Yet, there is no broad federal CSR mandate, and little coordination among these dispersed programs.
One option is for each hemispheric government to name a national point of contact, a CSR pivot, to coordinate CSR programs within and among nations. In the United Kingdom, the Cabinet Level Department for Business, Enterprise and Regulatory Reform hasresponsibility for intra-governmental coordination of CSR. Sweden appoints a roving CSR Ambassador.
7: Mandate the Multilateral Development Banks To Scale-Up Their Contributions.
The Inter-American Development Bank has played a pioneering role in fostering national CSR associations and their umbrella network. The Inter-American Bank has also published seminal studies on linking CSR and the MDGs and on ways to more fully engage small and medium enterprises in social responsibility and sector clusters. Similarly, the World Bank Group has supported cutting-edge CSR initiatives, including the Equator Principles that help major private financial institutions screen large raw materials projects for compliance with CSR standards. Now, in the next “scaling up” stage proposed here, the multilateral development banks (MDBs) have much more to contribute: resources and expertise, and perhaps of even greater value, the powers of convocation and validation.
Beyond the periodic CSR conferences that the Inter-American Bank has been sponsoring since 2002, the MDBs can take notice of the success of the Clinton Global Initiative which convenes each September in New York City during the UN General Assembly, gathering high-profile political personalities and civil society leaders with corporate CEOs to shine their intense spotlights on worthy CSR initiatives. In addition, the multilateral banks excel at capacity-building, and should bolster those civil society organizations that make up the “demand side” triggers for CSR. The MDBs can also help construct the certification market so necessary to improving the transparency and credibility of corporate reporting.
But the MDBs will fully engage only if the U.S. government, as their major shareholder, urges them to do so. It would be much better if the approach is made not by the U.S. alone but by interested Western Hemisphere nations as a group. In 2009, coincident with a new team in the White House, the 5th Summit of the Americas is scheduled to convene in Trinidad and Tobago. What a perfect opportunity, in the context of a summit undoubtedly focusing on the pressing social agenda, for the region’s top political leadership to enroll its private sectors, in partnership with the MDBs, in an historic campaign to stabilize democracy by driving poverty from our hemisphere.
Seizing the Moment
Today, favorable trade winds are blowing in most of Latin America. For the private sector , profits are rich and equity markets have skyrocketed. Yet the heady numbers conceal smoldering social resentments, widespread public cynicism, and debilitating poverty.
Increasingly, the Latin American private sector recognizes that Corporate Social Responsibility can help to bridge these dangerous divides. But if CSR is to fulfill its promise in the Western Hemisphere, governments and private sectors must join forces to design a robust regional regime that builds credible, high-quality standards and sets meaningful, measurable goals that pursue broader national aspirations. The general public must be assured that the private sector is acting with social purpose and that pledges are truly being met. The precise arrangements among public institutions and private firms will vary from country to country. What matters to the average citizen, as always, will be the actual results.