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Archive for the ‘Corporate responsibility’ Category

When public projects get too risky

Posted by David Kassel on April 10, 2011

In the March/April issue of Public Administration Review, two academic researchers describe an extraordinary breakdown in public sector management.

In “Waste in the Sewer: The Collapse of Accountability and Transparency in Public Finance in Jefferson County, Alabama,” Michael Howell-Moroney and Jeremy Hall detail a highly risky debt scheme that county officials engaged in, hoping to finance a major sewer project without raising sewer rates.  It didn’t work.

The scheme involved the county’s use of auction rate debt and financial derivative instruments known as rate swaps — yes, the same types of instruments that fueled the subprime mortgage crisis.  The whole thing went awry when the national mortgage crisis hit; and, as of the writing of the article, Jefferson County was on the verge of bankruptcy, unable to pay service on $3.3 billion worth of sewer debt.  Jefferson County is relatively small by national standards, but it holds the sixth highest level of debt of any county in the nation.  If the county were to go bankrupt, it would be the largest municpal bankrupty in U.S. history.

Howell-Moroney and Hall take us step by step through a thicket of poor judgment by private financial institutions, mismanagement and corruption by state and county officials, and a lack of adequate oversight by regulatory authorities.  They tell a compelling story, but it should be noted that  Jefferson County isn’t alone in engaging in risky financial and managerial schemes for public projects, although it appears to have dug itself deeper into a financial and legal mess than most. 

In recent years, municipalities around the country have resorted to novel and often complex financial and managerial arrangements in undertaking similar capital projects.  Often termed “public-private partnerships,” these are strictly business arrangements, and the long-term financial risks are often disproportionately placed on the public sector entities.

I discuss some of these cases in my book, “Managing Public Sector Projects,” such as that of Cranston, Rhode Island, which entered into a 25-year agreement with a contractor to upgrade its wastewater treatment system.  The agreement involved a $48 million up-front cash advance to the city to be paid back over the life of the contract.  Cranston projected it would improve its municipal credit rating due to the contract, but, in fact, the opposite occurred — its bond rating went down.  In the 10-year period following the 1997 contract signing, the city’s sewer rates jumped 55 percent.

In Lynn, Massachusetts, the sewer commission sought a legislative exemption in 1998 from the state’s public works bidding law to undertake a major sewer sewer system and treatment plant upgrade.  The commission ended up with a non-competitive solicitation process for sewer contractors that failed to identify beforehand the specifications of the sewer system it wanted.  The result was the approval of a proposal that was projected by the Massachusetts Inspector General to cost $22 million more than if the process had been competitively bid.

Jefferson County appears to have combined no-bid contracting arrangements with risky financing.  Program specifications were also missing in this case, and the county ended up approving numerous sewer projects that were found to be not required under terms of a consent decree with the Environmental Protection Agency.

To date, 21 Jefferson County employees and private contractors have been indicted by federal prosecutors in connection with the sewer program, according to Howell-Moroney and Hall.  Numerous no-bid contract and change orders were allegedly approved by county officials in exchange for bribes and other favors.  The $10 million to $20 million of additional costs found to have resulted from those alleged instances of fraud and mismanagement was then multiplied many times over by the debacle of the interest swap arrangements.

Howell-Moroney and Hall call for improved interest rate swap regulation and improved financial risk analysis by private-sector ratings agencies.  They also call on public agencies, such as Jefferson County government, to specify clearer goals and objectives in undertaking public projects.

These are worthwhile recommendations.  We’re finding out the hard way not only that there are no easy financial paths to follow in undertaking critically important public sector projects, but those who promise easy fixes are not to be trusted.


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How government can regain the capacity to control and manage environmental disasters

Posted by David Kassel on June 11, 2010

On a recent segment of MSNBC’s “Morning Joe,” the folks around the table were discussing the federal government’s seeming inability to get BP to act with urgency and effectiveness in stopping the oil leaking into the Gulf of Mexico.

Much of the discussion, of course, concerned the damage to the environment that is being compounded daily by the spreading oil.  But there was also frustration expressed by just about everyone at the table at the government’s “loss of capacity” to do anything about it. 

It does seem that we used to be a “can do” nation that could win wars unambiguously, land men on the moon, and respond effectively to disasters.  But it seems we have lost much of our capacity in recent years, not only to accomplish great public undertakings, but even to manage the growing number of private sector actors that have moved in to fill the vacuum. 

Why is this?  Have we, in fact, become a “hollow state” in which public agencies have little ability left to do anything other than rubber stamp corporate activities, many of which seem irresponsible if not downright destructive?  From the reconstruction of Iraq to the Big Dig in Boston, we no longer seem to be able to control spiraling costs or ensure top quality in the results. 

In fact, the related managerial trends of privatization, decentralization, and deregulation have combined in the past couple of decades to reduce government’s capacity to act effectively in these instances.   The Government Accountability Office reported that while the amount of federal contracting rose by 11 percent between 1997 and 2001, the size of the federal workforce devoted to managing contracts decreased by 5 percent.   This phenomenon has certainly been true at the state and local levels as well. 

The late academic scholar Larry Terry pointed to a loss in “institutional memory” in government due to the departure of “institutional elders–those individuals who possess extensive knowledge, expertise, and valuable information about an organization’s history…”    Some of this governmental loss in capacity is the result of downsizing trends in government that took root in the Reagan years and continued during the Clinton years and during the presidencies of Bush 1 and 2.  The New Public Management, which was promoted by the Clinton administration, promoted “market driven management,” which advocated increased privatization of government services and the use of private sector practices and technologies within government.  

Meanwhile, countless politicians, from state legislators to presidents, have built their political careers on criticizing government as too big, bureaucratic, and ineffective.  The result, however, is that we now have a government in this country that may be a little less big, but still seems bureaucratic and even more ineffective. 

But that doesn’t mean we can’t undertake great projects anymore or that government is doomed to impotence in controlling  oil spills and other disasters.  Take the oil spill in the Gulf.  Government still has the capacity to act effectively in situations like that.  It simply has to act smarter. 

First, political leaders and public managers must resist the temptation to muddle through these crises with ad-hoc decisions that seem to change each day on the basis of news reports and polling.  The president needs to establish an environmental crisis team that can respond immediately to situations such as the oil spill, similar to the crisis team that advises him during national security emergencies.  

When an environmental crisis occurs, the president and his team must immediately develop a coherent plan for dealing with it.  That process must involve a careful analysis and definition of the problem the team is facing.  The president and all team members must constantly question their presumptions about the problem and its possible solutions.  From day one, such a team could have held a series of meetings in which they asked themselves: what methods of stopping the oil leak are likely to be the most successful and to stop it the fastest?  BP engineers and executives as well as outside oil industry and environmental experts should have been called in to the meetings. 

Many collateral issues should have been explored in the meetings as well, including the best options for cleaning up the already-spilled oil, the safety of the chemical dispersant being used by BP, and how the oil-capping and cleanup activities would be financed. 

The project plans that emerged from that process would have clear scopes of work for BP and others to accomplish as well as clear penalties for failure to meet the specifications.  Then, once the plans had been put into effect, the president and his crisis team would be well-positioned to monitor and assess the project activities in accordance with the plans. 

Both public and private-sector organizations have always suffered from a lack of systematic approaches to dealing with complex projects and sudden crises.  It’s all the more imperative that such approaches be developed and used by our current downsized public sector in our increasingly fragile world.

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Following the AIG money

Posted by David Kassel on October 8, 2009

U.S. taxpayers have pumped more than $180 billion in bailout assistance to the American International Group (AIG) because, as we all know, the company was too big to fail.

It’s not surprising that the GAO reached a similar conclusion  in a comprehensive report released last month on why the bailout occurred.  The GAO also looked at where the money actually went and whether or not it actually helped the company.  After slogging through the GAO report, I’ve come to the conclusion that the GAO has concluded that:

  • The company was indeed too big to fail.
  • The money was provided to AIG in the form of loans and equity investments, contingent on the company’s winding down its AIG Financial Products Corporation and divesting itself of other businesses. 
  • It’s too early to tell whether all of the bailout money will enable AIG to survive in the long term.

Not real comforting news to taxpayers.  But the report doesn’t really seem to take a position on a key criticism of the bailout, which was that the government shouldn’t have paid AIG to clean up the credit default swap mess.  Rather, it could have infused funds directly to the banks that bought the derivitives, letting them take haircuts.

Another question I’m now left with about AIG has to do with something that perhaps inadvertently stood out in the GAO report.   On pages 6 and 7 of the report, the company’s organizational chart is reproduced (it takes 2 pages to display the chart).   As the GAO notes, AIG comprises at least 223 companies and has operations in over 130 countries and jurisdictions worldwide.  In addition to its financial products division, the AIG organization includes the largest domestic life insurer and second largest domestic property and casualty insurance company in the U.S.

Couldn’t the Federal Reserve Bank of New York and the U.S. Treasury Department have ordered AIG to cut say 100 or 150 of those 223 divisions loose before pumping in all of that bailout money?

According to the organizational chart, AIG also owns the AIG Bulgaria Insurance Company, the American Fuji Fire and Marine Insurance Company, the New Hampshire Insurance Company, something called American General Finance Services of Alabama, the American General Consumer Discount Company,  and much much more.   AIG is a company that clearly spent years acquiring other companies all over the world until, yes, it finally achieved its goal — it became too big to fail.

Or did it?  Had the company begun shedding the AIG Bulgaria Insurance Company, the American General Consumer Discount Company and some of those other firms early on,  mightn’t it no longer have been too big to fail when the federal government began considering the bailouts? 

According to the GAO report, that divestment is only happening now.  The GAO stated that the Federal Reserve expects the disposition of assets to be the principal way by which AIG will repay the government loans and allow the Treasury to recoup equity investments.  The report added that AIG’s plan, according to its former chief executive officer, was to sell off about 65 percent of the company.  However, the current chief executive was reportedly re-evaluating that plan.

Meanwhile, until all of that debt is repaid and the equity interests repurchased or sold, U.S. taxpayers remain exposed to those credit and investment risks, according to the GAO.   The watchdog agency notes that “the sustainability of any positive trends of AIG’s operations and repayment efforts is not yet clear.” 
Compared to the scrutiny that Congress is now giving to efforts to finance the administration’s health care reform proposals, it seems the bailout of companies like AIG a few months back went through with few questions asked. 

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Is GM serious about its future this time?

Posted by David Kassel on July 20, 2009

Given General Motors’ campaign against its own electric car, the EV1, in the 1990s, it’s hard to be confident that they are serious this time around with their second electric model, the Volt.

Also, what happened with the EV1 may say a lot about why the company want bankrupt  in 2009. 

As The Washington Post recently reported,  it’s not clear that GM has learned any lessons from that short-lived bankruptcy.   The company is continuing to put money into the gas-guzzling Chevrolet Camaro SS, which has a 400-plus horse power V-8 engine and gets 25 miles to the gallon on the highway.  Bob Lutz, a vice chairman at GM, is quoted as saying that the Chevrolet Volt, the electric car under development, is a “symbol”  for the company. 

That’s fine, but is it only a symbol, or is there going to be substance this time to GM’s campaign for the Volt?

It’s important to keep in mind that once the bankruptcy dust settles, the federal government will have poured in $49 billion to help reorganize and save the company.   The result will be the closing of thousands of dealerships, a dozen assembly plants, and the loss of more than 100,000 jobs.  Along the way, GM missed the opportunity that Toyota grabbed in the development of the hybrid Prius.  What happened with the EV1 really was a murder of sorts.

GM killed off  the EV1  after corporate officials balked at more than $300 million for further development.  At the time, GM nearly had the alternative-car market to itself, according to The Washington Post. 

I recently watched the documentary, Who Killed the Electric Car?,  for the first time.   For me, one of the most shocking parts of the  film was footage of the company repossesing all existing models the EV1 from people who were leasing them and who wanted to keep them, and then taking the cars to be crushed in scrapyards.  Apparently, every last car had to be removed and all record of its existance erased.   The film makes a convincing case that GM was in bed with the oil industry, which feared that electric vehicles would take away part of their vast market. 

When a company destroys its own inventory in order to stop the technology of the future, you know something is very wrong.  Here’s hoping things will go differently with the Volt.

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Why hasn’t Halliburton come up more in the presidential campaign?

Posted by David Kassel on October 28, 2008

John McCain has repeatedly sought to portray Barack Obama as a proponent of earmark and pork barrel spending, using the famous and inaccurate $3 million overhead projector example in the debates.

It would have been nice had Obama hit back on McCain’s apparently extensive ties to U.S. military contractors in Iraq.   Now, there’s some real pork to talk about.

A 2005 report by the Congressional Committee on Government Reform stated that government auditors had found that “questioned and unsupported” costs by Halliburton alone exceeded $1.4 billion under just two Iraq reconstruction contracts.  As of 2007, there was more than $10 billion in questioned and unsupported costs relating to Iraq reconstruction and troop support contracts, according to a Government Reform Committee hearing transcript. 

The McCainSource blog, by the way, details McCain’s ties to military contractors, noting that the top 10 defense contractors alone funneled $216,259 in political contributions to him.  And McCain’s top advisers and fundraisers have been paid millions of dollars to lobby the Pentagon, the White House and Members of Congress.  As The McCain Source blog noted, McCain opposed several measures to hold contractors accountable, including this vote to create a Senate committee to investigate contractor payments in Iraq and Afghanistan.

Yet, Obama has made little mention on the campaign trail of the lack of oversight of contractors and the resulting drain of U.S. resources in contracts with them. The history in Iraq of Halliburton alone could have been a major campaign issue.

The Government Reform Committee report noted that Halliburton had three multi-billion dollar contracts in Iraq. One of them, a sole-source contract, was awarded in secret in March 2003 to Halliburton’s subsidiary, Kellogg Brown and Root.  The Government Accountability Office reported that the Defense Department paid more than $220 million in “questioned” costs under it.

According to the Committee, all three of Halliburton’s major contracts in Iraq have been “cost plus award fee,” or “cost-plus,” meaning that Halliburton is reimbursed for costs it incurs under the contracts and then receives its profit, or fee, as a percentage of those costs.

The Committee report stated that former Halliburton employees have provided information to Congress that the company charged $45 for cases of soda, billed $100 to clean 15-pound bags of laundry, and housed its executives at a five-star hotel in Kuwait.  Halliburton truck drivers have testified that the company “torched” brand new $85,000 trucks rather than perform relatively minor repairs and regular maintenance on them.  Halliburton procurement officials described the company’s motto in Iraq as “Don’t worry  about price. It’s cost-plus.”

Meanwhile, the Special Inspector General for Iraq Reconstruction reported that under another Iraq reconstruction contract, Halliburton-subsidiary KBR billed the government for $52 million in administrative costs during a nine-month period of inactivity, before it was issued a task order.

There’s clearly a lot of information out there from government sources about these examples of real pork.  It just isn’t getting talked about for some reason.

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A role for nonprofits in the subprime crisis

Posted by David Kassel on July 21, 2008

Nonprofits have come off looking a lot better in the subprime mortgage scandal than their counterparts in the for-profit banking industry and the federal government, says Rick Cohen of The Nonprofit Quarterly

Cohen maintains that community development corporations (CDCs) and other nonprofit housing development organizations have been careful not to push new homeowners into risky mortgages.  And while the federal government has largely been interested in protecting investors, nonprofit organizations have been busy, trying to help homeowners in trouble. 

Cohen cites the work already done of groups such as Neighborhood Assistance Corporation of America (NACA), which he contends is “among the most aggressive and most successful national nonprofits engaged in refinancing the mortgages of families facing subprime-induced foreclosures.”  In addition, the Center for American Progress in partnership with Enterprise Community Partners has proposed the Great American Dream Stabilization (GARDNS) Fund, to be capitalized by a $10 billion Community Development Block Grant appropriation.  The fund would be used to help low and moderate-income homeowners purchase foreclosed and abandoned properties.

As a January report on the GARDNS Fund plan by the Center for American Progress notes:

…debating whether subprime borrowers were more at fault than unregulated mortgage companies is no more productive than arguing about whether the negligent camper or the neglected forest clearance practices contributed more to the rapid spread of a wildfire-
the first order of business is putting out the fire before it consumes more homes.

Cohen also suggests in “How Foundations Can Heal the Housing Crisis,” that nonprofit charitable foundations will have an increasing role to play in financing the rehabilitiation of abandoned properities across the country due to foreclosures.

Foundations can help now before federal money starts flowing, Cohen suggests, by providing grants to municipalities and nonprofits to begin rehabilitating properties and to manage rental units and rebuild neighborhoods.  Cohen maintains that:

now is the time for them (foundations) – and other organizations with vast tax-exempt endowments – to put billions of their dollars to work as a capital base for groups that are trying to stimulate new investments in financially challenged neighborhoods.

Cohen adds that smaller and medium-sized cities, in particular, that have been hit hard by the property-foreclosure crisis, don’t have access to large foundations with “signficant track records in housing and community-development investment.”

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The Globe’s view of the “best” companies in Massachusetts

Posted by David Kassel on May 20, 2008

About a year ago, shortly after I first started this blog, I took aim at the The Boston Globe’s annual Globe 100, which the paper touts as “The Best of Massachusetts Business.”

The problem I had with the ranking is that it is entirely based on financial measures, such as return on average equity, total revenues and and one-year change in revenue and profit margin.  Do bottom-line or profitablity measures alone really tell you which companies are truly the “best?”  The Globe’s ranking seemed to be failing to take into account the dimension of ethics or corporate social responsibility, which has steadily gained acceptance as an important measure of a company’s overall performance.

In other words, do companies exist just to satisfy their shareholders’ interests, or are there other stakeholders involved here, such as consumers, workers, the environment? 

I noted, in fact, that those additional societal dimensions are taken into account in the annual Corporate Responsbility Index, which is compiled by a nonprofit, UK-based organization called Business in the Community.  The 2006 CR Index was published by The London Sunday Times earlier this month.  The Index ranks the 100 most “responsible” companies in Britain based on measures of environmental and social impact.  The ranking process is a rigorous one that requires companies to fill out a survey that takes up to two months to complete, and requires site visits to the firms and internal auditing.

Last year, I asked The Boston Globe about their business ranking criteria, and Caleb Solomon, The Globe’s business editor then in charge of The Globe 100 responded by saying that “augmenting our coverage with some social meaures is something we’re looking at.”  

Well, The Globe has just published its 2008 edition of the Globe 100, bound in a sleek magazine edition to mark the 20th anniversary of the business rankings.  They must still be looking at augmenting their coverage with some social measures because their criteria this year for selecting their 100 “best” companies haven’t changed.  The ranking is based on the same financial measures as it was the year before and the year before that.

The Globe’s current ranking notes that five Massachusetts companies have made the 100 list in the past 20 years.  They are the financial firms of Eaton Vance Corp and State Street Corp; defense contractor Raytheon Co.; retailer TJX Cos.; and the uniform-service company UniFirst Corp.  Granted, these are probably great companies to own stock in right now.  But are they the best companies from a societal point of view?  Are there not other Massachusetts companies out there that may not be posting as high a return on equity as these five perennial makers of the Globe 100, but that might be doing more for their workers, consumers, their immediate neighbors, and the environment?

We won’t know the answer to that because The Globe isn’t yet interested in those additional measures.  IMHO, our Massachusetts’ major newspaper of record is behind the Times on this one.

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Do companies do well by doing good?

Posted by David Kassel on March 25, 2008

Three academic researchers have produced the most comprehensive review to date of 35 years of studies on a question that seems to have become more timely and pressing than ever—do efforts by corporations to benefit society also benefit their bottom lines?

A draft version of their paper, “Does it Pay to be Good?”, by Joshua Margolis, Hillary Anger Elfenbein, and James Walsh, can be found on The Economist website and has been discussed in The New York Times.  Margolis said the authors are continuing to revise the paper.  Last year, Margolis asked me to hold off in posting a blog entry about the paper, but yesterday he extended permission to cite the paper and post this blog entry.  He said he hopes to have an updated version of the paper by May.

The authors have so far produced an analysis of 167 studies, and concluded that, in general, these studies found there was a mildly positive relationship between corporate social and financial performance.

So, what does that really mean?  The attention to that question is the real strength of this analysis.

First of all, the authors note the stakes involved in the three decades of research they reviewed:

If only doing good could be connected to doing well, then companies might be persuaded to act more conscientiously, whether in cleaning up their own questionable conduct or in redressing societal ills….A positive link between social and financial performance…would license companies to pursue the good…

In 1970, they note that Milton Friedman laid down the gauntlet by criticizing any firm that made so-called socially responsible investments, arguing that such activities amounted to theft from the shareholders.  As a result, at least 167 studies have been conducted since 1972 to study the effect of corporate social performance on corporate financial performance, and there have been 16 reviews of this research.   Margolis et al. are the first to offer a comprehensive appraisal of all these studies, and to suggest an entirely new path for future research.

They found that most of the 167 studies did not find statistically significant relationships between corporate social and financial performance.  Yet, certain conclusions can be drawn from the studies, among them that companies do not appear to suffer financial harm due to socially responsible investments.  Only 2 percent of the studies reported a significant negative effect on financial performance in undertaking socially responsible activities.   This appears to negate Friedman’s warnings that companies that undertake these activities will destroy shareholder value in the process.

As the authors put it:

Companies can do good and do well, even if companies do not always do well by doing good.

And, on the negative side, companies that act irresponsibly and are caught, often suffer costly consequences.

Yet, the authors also note that the studies have shown that the next marginal dollar spent on a socially responsible investment is not necessarily going to provide as great a financial return as other types of investments.  Therefore, there should be reasons other than just the potential financial benefits for pursuing corporate social performance.  Those conclusions would seem to jibe with those of David Vogel, author of “The Market for Virtue,” who has argued that Corporate Social Responsibility initiatives are an “insurance premium” for businesses rather than a consideration at the core of a business’s processes.

In fact, Margolis et al. suggest that the studies they reviewed show corporate social performance is a legitmate activity that may not produce hugh financial returns; and yet, companies ignore it at their own peril.  The authors cite the case of Wal-Mart, which found its investment plans disrupted because its corporate and marketing policies generated so much opposition.

The authors further conclude that one of the most under-explored effects of corporate social performance is whether those policies actually result in measurable benefits to society as a whole.  And they suggest that it may now be time for researchers to stop trying to find a causal link between corporate social performance and corporate financial performance, and turn their attention to three possible questions for future research:  1) why do firms pursue corporate social performance?  2) how do they go about it? and 3) how can they pursue both corporate social performance and corporate financial performance at the same time?

In other words, the question shouldn’t be: do firms do well by doing good, but rather, how can firms do good and do well at the same time?

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Vogel: The business case for corporate responsibility will always be about to be proven

Posted by David Kassel on March 10, 2008

In 2005, David Vogel, a professor at the University of California, Berkeley, wrote a book called The Market for Virtue, which concluded that the corporate social responsibility movement had only a limited potential to bring about significant change in the way companies do business.

In a seminar last week at the Kennedy School of Government, Vogel didn’t change his message much.

Corporate social responsibility (CSR) is alive and well by every possible dimension, he conceded.  There has been an expansion in private codes of ethics; and private, voluntary regulation—so-called soft regulation—has expanded significantly.  It’s all very encouraging, but what does it mean?  Are companies behaving more responsibly?  It’s very difficult to say because the boundaries of what constitutes CSR keep shifting and companies are multifaceted, Vogel maintained.

British Petroleum, for example, has been applauded for addressing climate change issues in its business policies, but has been criticized for oil spills in Alaska, he noted.  Merck has been praised for providing drugs to cure river blindness disease in Africa, yet criticized for marketing Vioxx.  Exxon has an exemplary health and safety compliance record regarding its own employees, but hasn’t been good on global climate issues.

In the financial sector, the subprime loan mess has eclipsed much of the progress made along corporate responsibility indexes.  The fact is that while the risks and opportunities of CSR have become more important to managers in recent years, their importance relative to other business processes have not increased, Vogel argued.  CSR is an “insurance premium” for businesses, rather than a consideration at the core of a business’s processes. 

Yet, Vogel acknowledges, there remains an irresistable attractiveness in the concept of CSR and the belief “that you can make money and make the world a better place.”  The problem, he maintained, is that “the business case for CSR will always be about to be proven, but will never be proven.”

One thing that has changed about CSR is the relative importance advocates place on public policy and government regulation.  In the recent past, there was a view that government had become irrelevant as an actor in the sphere of social responsibility, but that view is now seen as naive and there is an awareness that there are limits to CSR.  Global climate change is an example.  Without government regulation and support, companies are not going to make the investments needed to begin to address that problem, he maintained.

Vogel disagreed with a comment from a member of the audience that CSR initiatives continue to be hampered by the “command and control” nature of government regulation.  “I like command and control,” he said, pointing out that advances since the 1960s in clean air, civil rights, and consumer product safety in this country have been the result of command-and-control government intervention and regulation.

Yet, Vogel was sanguine about the potential for government to resume its former pre-eminent role as a regulator of the corporate sector, arguing that government’s role in that regard constantly fluctuates.   I’m not sure I agree with him there.  It seems that since the Reagan years, there has been a long and steady slide in the political willingness in this country to use government in that command-and-control function.  The trends seem largely to have been downwards, and I’m not sure there’s a clear consensus for a reversal in the foreseeable future.

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Does global business have a responsibility to promote democracy?

Posted by David Kassel on February 1, 2008

Nien-hê Hsieh, associate professor of legal studies and business ethics at the Wharton School at the University of Pennsylvania, argues that there are conditions under which large, multi-national companies have a responsibility to promote democratic political institutions in host countries that lack them.

In a paper that he discussed this week at a seminar co-sponsored by the the Kennedy School of Government’s Corporate Social Responsibility Initiative, Hsieh acknowledges that his assertion is controversial and examines a number of objections to it. 

He maintains that if a corporation is operating in a country that doesn’t have a minimal level of electoral democracy, such as free and fair elections and freedom of speech, people in that country have no redress from economic harms.  It’s a long overdue subject of discussion and concern, given the long history of involvement of U.S.-based corporations, in particular, in countries around the world that have lacked basic democratic institutions.

Hsieh disagrees with the argument that while multi-national enterprises (MNEs) have a duty to avoid violating basic human rights in the countries in which they operate, they don’t have a duty to come to the aid of those whose human rights are violated.  He maintains that violations of human rights aren’t the only way a person can be harmed through economic activity.  He cites a case in which a subsidiary of Texaco in partnership with PetroEcuador, the state oil company of Ecuador, extracted oil from the Oriente region of the Ecuadorian Amazon basin and released oil-laced water and millions of gallons of crude oil into the Amazon forests between 1964 and 1990.

In addition, more than 4 million gallons of highly toxic “produced water” was dumped daily into open pits rather than re-injected into the ground.  The contamination dramatically increased cancer rates in the region and caused widespread sanitation problems and hundreds of cases of avoidable sickness and death.  Ultimately, a class action lawsuit was filed on behalf of 30,000 Indians and farmers in the Oriente region and 25,000 downstream residents of Peru.

Hsieh maintains that the Texaco case shows that while some people who were negatively affected by the pollution may have benefitted economically from the MNE partnership, there is no reason to assume they were made better off on the whole.  On the contrary, a significant number of people were harmed as a result of the oil drilling activities.

In cases such as that, a company has an obligation, Hsieh argues, to take action to provide people harmed by its economic activity with some form of redress by promoting the development of democratic institutions.  There are three ways a company can do that: 1) it can undertake business activities that fall under the heading of “corporate social responsibility”; 2) it can promote those institutions through normal business activities; and 3) it can promote those institutions through internal practices and policies.

Examples of the first method of promoting institutions through corporate social responsibility are the participation of the Norwegian oil company, Statoil, in the training of Venezuelan judges about human rights law and IKEA’s funding of bridge schools in India.  An example of the use of normal business activities for this purpose might be the provision by Internet service providers of access to information critical of the government of the host country in which they are operating.  An example of the third method might involve promoting democratic ideals, such as nondiscrimination or participatory decision-making in a company’s internal policies, as well as providing support to their workers who are engaged in the promotion of democratic political institutions in the host country.

Hsieh dismisses objections that his proposals would constitute unjustified interference with the sovereignty of the countries hosting the MNEs.  But in his presentation this week at the Kennedy School, he acknowledged that there are a number of questions about his approach that remain unanswered, such as how much it is reasonable to ask of MNEs in promoting democratic institutions.

Given the number of questions that Hsieh had to field at the seminar, it appears clear that the question of a MNE’s obligations to promote democracy in non-democratic regimes constitutes a field of study that is still in its infancy.  My own concern is that the vagueness of Hsieh’s proposals could allow companies that have caused economic or other harms in other countries to rationalize their continued presence there as long as they are working in some vague way to promote democratic institutions.  But it’s also clear that studies such as Hsieh’s are a start in the right direction.

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