Impact of Globalization on Corporate Social Responsibility in Multinational Companies

OF GLOBALIZATION

In today‘s globalized world, no single nation state can formulate rules for decision making and implementation of socially viable projects because the transnational corporations and civil society groups are assuming a major role, along with multilateral agencies such as the UN. These agencies are involved in peacekeeping, protecting human rights and/or implementing social and environmental standards. This change indicates a shift in global business regulations from state-centric forms towards new multilateral non-territorial modes of regulation. The concept of regulation also is enlarged to include a greater degree of self-regulation. MNCs have since the 1990s enlarged their role in CSR activities, and they now carry out sustainability programmes along with other activities such as corporate philanthropy and business ethics. They are also engaged with NGOs in public-private partnerships. Some scholars have advocated that MNCs should focus on human rights, while others continue to support corporate philanthropy. In reality, the MNCs have assumed state-like roles in areas where the states are unable to provide public goods. They are held responsible for providing social rights and civil rights as also political rights. But MNCs cannot enforce human rights in the same manner as governments do. The theory of free trade supports the notion the free trade will allow economic growth and social welfare. This view became part of public policy since the 1990s in major economies of the West and South, resulting in liberalization and abolition of trade barriers. Free trade will enhance the comparative advantage of costs and resources for developing countries. On the other hand, a policy that creates harmonization of social and environmental standards may not promote such a comparative advantage since standards are regarded as non-tariff trade barriers. Hence, the developing countries have always voted against the provision of social and environmental standards.5 There are obvious limits to state power as shown by the offshore activities of the US multinationals. Also, we have evidence of the US policy limitations on regulating financial markets, since corporations have considerable impact on formulation of national and international economic policies. Many governments therefore are unable to exercise their independent powers in the process of policy-making and implementation of MNC projects. The stakeholder approach

5 Scherer, Palazzo and Baumann, 2006

satisfies the stakeholders‘ expectations. The perspective of the corporation as a political actor and as the guarantor of rights raises the issue of legitimacy. If the MNCs assume the role of the state and generate global rules, then it becomes necessary to control them, just as the state is controlled by its citizens. This has far-reaching consequences for corporate governance of MNCs. Corporations decides on a global framework without being authorized or controlled democratically. In this sense, the UN Global Compact gives a lot of responsibility and power to the MNCs without any significant control mechanism. However, the UN Global Compact is a voluntary mechanism, and the UN has no process of monitoring the outcomes. The well-known cases of Royal Dutch Shell Group in 1995 focused on the issue of human rights.6 Similar problems were associated with other types of extractive industries in Africa, but it is not only the MNCs, in some countries, the government was also involved. Some MNCs in association with the government, took illegal actions on the local community. It is because of these developments that the Extractive Industries Transparency Initiative (EITI) and instruments like the Kimberly process7 were initiated. MNCs in the pharmaceutical sector have their share of CSR issues, ranging from product safety, clinical trials and medical ethics. Also, the industry has faced numerous distribution and infrastructure problems in developing countries. Another important area of analysis is CSR implementation. Different types of implementation strategies are required at different stages of the organizational life cycle. There is a practice of corporate voluntarism, social impact assessment and internal management systems for CSR implementation. Management of supply chain is also emphasized. The UN undertakes social and environmental assessment of projects implemented in the developing world. There is a set of guidelines for the MNCs from Amnesty International and the Organization for Economic Co-operation and Development (OECD). Also, there are SIGMA Guidelines developed in 1999 by the British Standards Institution, Forum for the Future and Accountability (2003). The FORGE Guidance on CSR management and reporting for the financial services sector was introduced in 2002 by eight financial services companies. The Principles for Responsible Investment were issued in 2006. The ISO 14000 was launched in 1996. The ISO 14001 Standards cover environmental management

6 Holzer, 2007 7The Kimberley Process Certification Scheme (Kimberley Process or KP) is an international governmental certification scheme that was set up to prevent the trade in diamonds that fund conflict. Launched in January 2003, the scheme requires governments to certify that shipments of rough diamonds are conflict-free.

There are specialized guidelines on supply chain management of the World Bank. The advisory committee of the OECD has also issued guidelines on this subject. The Fair Labour Association and American Multi-stakeholder Platform have developed guidelines for the apparel industry. Social Accountability International is a US-based NGO dedicated to implementing and monitoring social accountability standards. Similarly, the EITI in the UK (1998) is an alliance of companies, traded unions and NGOs, which monitors various aspects of CSR implementation.8

CSR IN SUPPLY CHAIN MANAGEMENT

According to the stakeholder theory9, CSR actions are expected to fulfill the requirements of various stakeholders. Global brands like Nike, Adidas and McDonalds are under pressure from social groups to consider the labour and health-related impacts of their investments. These groups allege that MNCs exploit cheap labour in developing countries. In the US, the apparel industry‘s code of conduct for clothing and accessories manufacturing companies imposes certain requirements that must be observed by contractors and subcontractors, as well as suppliers. Whether in reality such legislation effectively covers compliance and quality issues from multiple suppliers is a moot question. The notion of accountability of the firm is also extendable to their suppliers. The question arises here: are the primary and secondary stakeholders responsible for the practices of companies from where they buy materials? In a joint project of the Global Reporting Initiative (GRI) and GTZ (GmbH), implemented on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), the project includes both the MNCs and SMEs. The focus is on sustainability performance and transparency in the supply chain. The main benefits to SMEs are acquiring competitive advantage and leadership, improvement of internal process and enhancing reputation and achieving trust and respect. According to a report by the United Nations Industrial Development Organization10 SMEs make up for more than 90 per cent of business worldwide and on an average, account for 50 per cent of GDP of all countries and 60 per cent of their employment.

8 Mares, 2008 9 The basic premise of the stakeholder theory is that business organizations have responsibility to various groups in society (the internal and external stakeholders) and not just the owners/shareholders. 10 UNIDO, 2006

► Establishment of best practices of supply chain responsibility. ► Development of mentoring partnership role for CSR. ► Raising awareness with suppliers on sustainability issues and induces integration of sustainability practices into suppliers businesses. ► Create an understanding of the business case for CSR reporting. ► Increase engagement and encourage reporting practices of their suppliers. The objectives of the project were to enable the suppliers to: ► Understand sustainability concept ► Start measuring sustainability performance ► Use reports as a catalyst for change within their organization ► Support their sustainability process. The intended benefits for both the MNCs and suppliers would be: ► Empowering TBL performance in the supply chain ► Facilitating understanding of sustainability concept ► Improving and strengthening relationships and forming transparent partnerships ► Creating and leveraging opportunities for the managers involved ► Improving risk management related to sustainability issues ► Increasing competitive advantage and reputation Green Supply Chain In recent literature, analyses mention green supply chain management, environmental purchasing social responsibility and ethical sourcing as also socially responsible purchasing. But in a more generic expression, we may describe these manifestations as CSR or CR. In such a conception, all the The EITI is a very important step towards ensuring ethics in the supply chain. Some concern has been raised recently that there are unresolved issues of SMEs with regard to the supply chain behavior. The Body Shop International was an early promoter of the EITI for its suppliers. MNCs are considered to be the globally integrated enterprises, but the fact remains that most of the global brands retain their own national identity. Coca-Cola is still largely perceived as an American brand and Royal Phillips is still considered a Dutch company, even though most of its production now takes place in East Asia and Eastern Europe. Therefore, territorial base is an important characteristic of global business. The MNCs need legitimacy from local stakeholders. In other words, they have a great need of social validation of their conduct and operations in the host countries. The important factors are social embeddedness, global integration, and location of production, network structure, ties in the value chain, and consequences for labour force. CSR determines legitimacy in terms of trust in the relationship between a business and its environment. Such companies require strategies for managing legitimacy. The study by Zutshi et al. (2009) has presented selected responses of 11 MNCs on the complex issue of child labour, a problem that continues worldwide. One of the multinationals in the automobile sector produces certain components using slave labour.12 There are examples of child labour being used in agriculture and manufacturing in Australia, the USA, UK and Canada. There are a number of voluntary standards for SCM such as BSR Global Compact, IOE, BSCI, ICTI, EICC and SEBEX.13

AND CSR

A series of corporate governance reforms were introduced in various developed and developing countries since the 1990s, focusing on improvements in the modern corporation‘s accountability and transparency. The focus of the governance framework, which was evolving in the developed economies, was the role and responsibilities of corporate boards.

11 The triple bottom line (TBL, or 3BL, also known as people, planet, profit or the three pillars) captures an expanded spectrum of values and criteria for measuring organizational (and societal) success: economic, ecological and social. 12 Zutshi et al., 2009 13 Zutshi et al., 2009

to managerial duties of care and loyalty. The generic concern is that the directors cannot be self-dealing and courts scrutinize the aspects of loyalty and managerial self-dealing more severely than duty of care. But directors can pursue non-pecuniary interests due to the inherent conflicts of interest. The US courts have considered only the pecuniary motive as duty of loyalty issues. The OECD principles of corporate governance emphasize that directors take decisions in good faith, by way of due diligence and care and serve the interests of the corporation and shareholders. As per legal perspectives, the state would need to regulate corporations in order to protect human rights. Developing countries regulate private actors, but the problem arises because they compete amongst themselves to attract foreign direct investment (FDI). Therefore, many governments may relax enforcement of regulations and may utilize limited resources to attract FDI. The UK and US have experienced transnational litigation, when the subsidiaries of MNCs violated certain norms. Developed countries introduced market access regulation targeted at the suppliers from developing countries. The UN norms on the responsibilities of MNCs propose that there should be periodic monitoring of these corporations. The UN Commission on Human Rights clarified standards of corporate responsibility in 2005.Also, there are legislations requiring different kinds of disclosures. For example, France mandates social and environmental reports from companies listed on the French Stock Exchange. In the UK, regulation on pension funds has been introduced. Similarly, the European Union has issued guidelines and directives on consultative structures. There is shareholder primacy in the US and UK. In Germany, Italy, Japan, and France the stock markets are less developed, and the institutional shareholders can leverage their strength and sell in bulk. The shareholders have brought about changes in public policy and regulation, outlining measures for the protection of their interest. The shareholding is rather dispersed and stock markets are liquid, whereby the stockholders can either enter or exit the market. The corporate governance system of the UK and USA indicates that the shareholders influence and oversight on companies weaken by the separation of ownership and control. Dispersed shareholders have few incentives to control and monitor the corporate management. ‗nexus of contract‘ view, which gives primacy to wealth creation through market signals. The third view is the productivity view, which gives the power to the management to override market signals. Scholars in recent times have questioned the bias of company laws in the US and UK, which are more favorable to wealth creation, and have emphasized the need for legal reform to take care of distributional issues.

INTERNATIONAL GUIDELINES FOR MNCs

By 2001, more than 250 codes of conduct were developed and circulated by various international agencies and industries for corporate conduct by MNCs in foreign countries. Other initiatives included the Caux Round Table15, Business for Social Responsibility16 and the Prince of Wales International Business Codes Forum17. In 1990, the US introduced Fair Labour Association, and in 1998, the UK launched the Ethical Trading Initiative. Similarly, other European countries also introduced social responsibility programmes. In 2000 came the Global UN Compact, and later, the ISO 26000. The ILO focused on social protection, social responsibility programmes. In 2000 came the Global UN Compact, and later, the ISO 26000. The ILO focused on social protection, social dialogue, employment creation, poverty, fair trade, globalization, child labour, forced labour, discrimination, labour migration, safety and health issues and sustainable development, among others. The OECD Principles on Multinational Enterprises were revised in 2002. In 2004, the UN Human Rights Commission declared its principles. In 1994, the North American Agreement on Labour Corporation was introduced outside the NAFTA agreement. There are two types of codes. One is used by social and non-profit actors and the other is drawn up by companies at the micro-level. Codes have a role in determining the relationship between public and private sectors. Codes can minimize the impact of command and control type of policies. In analyzing codes of conduct, social and environmental issues can be examined in terms of

14 A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. 15 The Caux Round Table (CRT) is an international network of experienced business leaders, who work with business and political leaders to design the intellectual strategies, management tools and practices to strengthen private enterprise and public governance to improve the global community. 16 BSR is a global network of more than 250 member companies to develop sustainable business strategies and solutions through consulting research, and cross-sector collaboration. 17 The Prince of Wales International Business Leaders Forum (IBLF) works with multinational companies to promote responsible business practices. It does this through partnership with NGOs and public sector bodies, particular in developing countries and emerging markets.

The codes have emphasized management policies and systems, environmental liabilities, stakeholder‘s relations, sustainable development, consumer interests, community interest, global development, legal requirements and ethics. The WTO Guidelines highlight the substitution of mercantilism by liberalism. The important principles of National Treatment (NT) and Most Favored Nation (MFN) treatment are highlighted. The NT Principles says that foreign firms cannot be treated worse than their domestic counterparts (GATT, GATS and TRIPS). Similarly, double taxation treaties are based on the same principles (OECD, Model Text Convention). According to the MFN principle, the State should grant the same terms to all other states as given to MFN. The economic actors should be treated equally. However, in practice there is evidence of inequality and discrimination.

Fidelity India Fidelity Management & Research Company (FMR) is an American multinational financial services corporation and one of the largest mutual fund and financial services groups in the world. Headquartered in Bangalore, FMR is engaged in community development programmes. It is collaborating with The Energy and Resources Institute (TERI) on managing environmental aspects of its operations. The Fidelity Foundation has a number of schemes for internal CSR. The CSR actions of the company are cause driven. There is emphasis on employee volunteering and non-financial incentives are being considered to encourage this activity. The company prepares quarterly reports for the governance board. CSR is a well thought out agenda and is implemented in accordance with the specific MOUs with select NGOs. Coca-Cola The Coca-Cola Company is an American multinational beverage corporation. It is a global leader in the beverage industry, and a manufacturer, retailer and marketer of non-alcoholic beverage. In India, the company carries out its CSR projects through the Coca-Cola Foundation, which was set up in September 2008. Generally, activities around the Coca-Cola undertake activities like water and environmental conservation. For example, it has dealt with issues like groundwater depletion and pollution through measures like rainwater harvesting. Further, it increased the supply of drinking water in Bundelkhand and Manipur19. It has also undertaken desalinization of the Sambhar Lake in Rajasthan. In

18 Kolk, Van Tulder and Welters, 1999 19 Jarwa and Murkata districts

is planning to provide electricity to these areas soon. Other activities include promoting healthy living (by encouraging people to adopt Ayurveda), social advancement activities and preserving cultural heritage. The Foundation is also considering tele-medicine to promote health in remote areas. Future initiatives of the company would focus on preservation of monuments, and improvement initiatives at the Nagina Lake at Mewar (Haryana). The Foundation‘s activities are funded by the Coca-Cola Foundation, Atlanta. Johnson & Johnson Johnson & Johnson is an American multinational pharmaceutical, medical devices and consumer packaged goods manufacturer founded in 1886. The company has CSR initiatives in the areas of women‘s empowerment, safety, environment, as well as community initiatives. The projects are implemented through selected NGOs. For identifying and selecting NGOs, the company undertakes a due diligence practice. All outlays on the projects on CSR are approved by the Asia-Pacific Committee of the company. The company has no formal department of CSR, but the HR group conducts CSR. J&J has health and environmental policies, which are reviewed annually. The company has a practice of encouraging and involving project champions, and accountability standards for CSR performance are determined. Capacity building programmes are conducted for NGOs and internal staff members. The thrust areas of the company are concern, care, commitment, community responsibility, disease prevention and building healthcare capacity. There is a committee called India Contributions Committee, which is assisted by 10 location committees, consisting of various functional heads. There is significant involvement of the senior management in CSR.

ABB

ABB is a Swiss-Swedish multinational corporation headquartered in Zurich, Switzerland. It is a leader in power and automation technologies and is a leader in power and automation technologies. The company has a dedicated sustainability team. The activities cover education, assistance to differently enabled, access to electricity, special projects, welfare/awareness, environment and safety. The HR and corporate communication departments support the sustainability programmes of the company. ABB supports six government schools which add up to 4,500 children across the country. The company helps the schools with infrastructure and basic amenities. In terms of sustainability drivers, the objectives are to ensure social and suppliers. The company‘s sustainability report is based on the GRI Guidelines. In India the company focuses on health and safety of contractors and their terms, since contractors are more involved in hazardous sites for project development and management. A training centre has been established in Jaipur for training in safety measures. In Rajasthan ABB has installed solar power systems for providing access to electricity. Glaxo Smith Kline Glaxo Smith Kline is a UK-based pharmaceutical and healthcare company. The company follows the rationale that it is linked closely to the communities in which it operates-locally, nationally and globally. The company‘s stated mission statement is ―To lend a helping hand to the less fortunate in our society through support to women, children and the aged in the areas of health and education‘. Implementing this philosophy in spirit, the company makes a positive contribution to the communities in which it operates, by investing in health and education programmes and partnerships that aim to bring sustainable improvements to under-served people. Being a premier pharmaceutical company in the country, GSK is committed to the communities in which it works. This is done by being proactive in improving the environment and participating and contributing actively towards tribal welfare. Their initiatives are primarily focused on women and children and are directed in the areas of health and education. The company believes that these areas are related and of direct concern to GSK. If there is proper education, one will eventually learn to be hygienic, and if one is hygienic, will one remain healthy. The organization spreads awareness on good practices of healthy living. The community development activities are attached to the Corporate Communications department. Since 1970, the company has been implementing various CSR activities apart from statutory ones. The following community development activities are carried through the company‘s social work unit situated at its head office in Mumbai. ► GSK India undertakes a number of rural development initiatives through Gramin Aarogya Vikas Sanstha (GAVS), a registered public trust promoted by Glaxo India since April 1997. ► GAVS works in 15 predominantly tribal villages in Peth taluka, Mission, GSK collected primary data from 92 villages around Nashik in the year 2005, to identify the most underserved village communities which need support. ► GAVS‘ mobile clinic visits a cluster of five villages in rotation covering all 15 villages. A from the local villages render help in this activity. Over 20,000 tribal people benefit from this health care initiative. Other projects include supporting the education of girl children, humanitarian relief during disasters and learning centers for underprivileged children.

CONCLUSION

MNCs in India have a prime mover advantage in the sense that they already have a track record of sustainability projects in several countries. They adapt their activities to the specific context of social and economic status of the host country. For example, Nestle‘s success story in transformation of Moga village in Punjab illustrates how a comprehensive economic and social programme transformed the local economy, society and institutions. Therefore, companies in India (as in the developing economies) do have an opportunity to learn from companies like Nestle, Hewlett-Packard, Intel, IBM, Accenture and others.

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Research Scholar, Department of Commerce and Management, Maharaj Vinayak Global University, Jaipur