Corporate Reputations, Branding and People Management 35

recently put by Joel Bakan (2004), a North American law pro- fessor, who has written a very powerful book and made a film about the impact of modern corporations in society. We dis- cussed this work earlier in Chapter 1, but it is worth repeating and extending some of his criticisms and those of others (e.g. Monbiot, 2000), who take a similar stance. Bakan argues from an examination of legal documents that corporations are bound by mandate to pursue relentlessly and without exception self-interested shareholder value, regardless of the harmful consequences it might cause to others. This is an extreme version of agency theory, which few corporate leaders would openly subscribe to; nevertheless, he argues, they have very little choice because of the legal, political and economic logics and structures of capitalist societies. His view is that such mandated corporations have come to dominate our lives in the developed and developing world, determining our lifestyles, culture, employment, economic and political choices. Aside from the iconography and ideology of modern business, which is all around us, corporations go further in dictating the deci- sions of national governments and controlling societal deci- sions that were once part of the public domain and subject to genuine political decisions by ordinary people. So, according to Bakan, it is corporations that now govern society, not govern- ments ‘for the people and by the people’. Yet, in true Hegelian fashion, every thesis brings about its own antithesis: it is the very power of modern, global corporations that leaves them open to reputational risk in the form of public mistrust, fear and demands for social and environmental accountability from society. The response has been an acknowledgement by corpo- rate leaders to understand and address the costs of poor repu- tations, and work hard to regain and maintain the trust of ‘stakeholders’, including an increasingly vociferous investor community and financial press. The vehicle for this identity and image change had been CSR, which is nothing but a means of persuading a sceptical public of the virtues of capitalism. Like many critics from the left, Bakan’s view of CSR is that it is largely fraudulent because corporations, in the final analysis, cannot do anything other than engage in the ‘pathological pursuit of profit and power’, his book’s subtitle. He cites the case of Sir John Browne, an icon of the CSR movement, and 324 Corporate Reputations, Branding and People Management BP’s pursuance of a green agenda as a mask behind which to ‘maintain consumer demand for petrochemicals’: The days when our business had a captive market for oil are probably ending … So we have to compete to ensure that oil remains the fuel of choice (quote from Sir John Browne). (Bakan, 2004, p. 46) On the potential for CSR, Bakan concludes: More generally, for Browne and all other business leaders, social and environmental goals are, and must be, strategies to advance the interests of their companies and shareholders; they can never legitimately be pursued as ends in themselves … (p. 46) Criticisms from within Bakan’s thesis is predicated on CSR being an important move- ment in society, yet even its adherents remain unconvinced of some of the arguments and evidence used to support it. First, the business case for CSR has often rested on the assumption that ‘doing good leads to doing well’; that creating product or service differentiation through CSR is a way of satisfying the firm’s needs for superior profits and serving societal goals. Daniel Diermeier (2006), a CSR supporter, has tempered this argu- ment with a view that it is really long-run cost reduction that is the best justification for CSR, because it is concerned with man- aging the downside of reputation risk rather than the upside of differentiation. Note the similarity between this argument and Bakan’s, but for very different reasons. Diermeier began his thesis by making a values case for CSR, claiming that values matter and that the values of the newer generations in advanced industrial societies are more inclined to be post-materialist, with a concern for the environment, tol- erance and social issues that are different from the materialist values of earlier generations that were influenced by hardship. Moreover, he argues that these values will remain relatively Chapter 9 Corporate strategy, corporate leadership, corporate identity 325 permanent throughout the lifetime of this new generation, pre- cisely because their formative years were shaped by times of plenty rather than hardship. The consequences, according to Diermeier, are that the shift to CSR is real and permanent (though our example of young financial analysts earlier may be seen as evidence of influential ‘Neanderthals’, or as the excep- tion that breaks this ‘rule’). As a result, companies will be pressed into responding to these value-changes by outsiders and insiders, especially when competing in the global market for talent. However, CSR issues are likely to vary in the same way that cul- tural values vary; some emerging economies not only cannot afford CSR but do not value it so highly because the values of their nationals have been formed under conditions of relative hardship, exacerbated by the growing gaps between rich and poor and by the impact of modern communications in high- lighting that gap to the poor. One only needs to see the good life invoiced by the skyline of San Diego in California from the run-down squalor of Tijuana in Mexico, literally within viewing distance, to have this gap rammed home forcibly. The consequences of these value-changes for competitive positioning are that businesses must be able to adapt their strate- gies to different segments of product markets (and employment markets), as we have consistently argued throughout this book. As Diermeier argues, for a product differentiation strategy to work by creating and capturing value from customers for socially responsible brands (e.g. the Body Shop or Patagonia), three factors have to be present: ■ Customers must be willing to pay more for socially responsible goods and services to cover the fixed and variable costs of providing them, implying that cus- tomers must be willing to pay sufficiently high mar- ginal prices and the market segment must be large enough to cover the fixed costs. ■ Socially responsible brands must be difficult to imitate to allow for both socially responsible and non-socially responsible brands to coexist. ■ The claims for social responsibility must be credible and customers must be able to verify these claims in some way. 326 Corporate Reputations, Branding and People Management Thus, in sufficiently large markets, it is possible for firms to earn superior profits from socially responsible brands by charg- ing a premium price for them if these three conditions hold. And there are examples of markets in which socially responsible brands do earn superior profits through charging more for their goods and services, such as the food market in which organic and ‘fair play’ producers are carving out a niche. However, the case for CSR does not really rest on this ‘doing business by doing good’ argument, but in lowering long-run costs. This, Diermeier argues, is the main argument for CSR: it does not rest on offering higher consumption value to willing consumers, which is difficult for them to verify anyway, but in delivering goods and services at lower costs to the environ- ment, which is simply a principle of good management and is independent of offering higher value. To prove his point he used the example of the contrast between BP and Shell in the 1990s. Clearly, there is only a small segment willing to pay higher prices for a commodity product such as petrol for their cars but BP’s strategy is not driven by a differentiation strategy in small segment markets; it is driven by its reputation for CSR and in protecting it. Shell, on the other hand, has had a number of problems with its reputation, resulting from its confrontation with Greenpeace, its proposed disposal of rigs in deep water, and in its operations in Nigeria where human rights were an issue. As a result, Shell has had to invest heavily in CSR to lower its costs arising from reputational risk in the long run and has had to work very hard to catch up with BP in particular markets. However, this will only be worthwhile if the expected savings from avoiding reputational damage are greater than the costs of com- plying with CSR practices. So in essence these are cost-driven strategies, arising from the nature of the markets they operate in, not price differentiation, which is the usual justification. This argument can also be extended to the market for talent. While there may be niche markets for talented people who are attracted by working for companies that offer socially respon- sible goods and services, more people are likely to be attracted to and remain with organizations with a history of avoiding damage to their reputations, since the individual reputations of talented individuals are likely to suffer from association with firms that have not invested in avoiding reputational damage. Chapter 9 Corporate strategy, corporate leadership, corporate identity 327 Criticisms of measurement While the idea of a triple bottom line has appeal to a number of firms and government departments that have used it in their pub- lic relations, including BT, AT&T, Shell and Dow Chemicals, the UK government and state governments in Australia, critics point out some fundamental problems with it, even as a metaphor. These are based on the contention that what is sound about 3BL isn’t novel and what is novel isn’t measurable (Norman and MacDonald, 2004). The claims of its proponents, in line with stakeholder theories of governance, are that firms should assess their overall long-term contribution to society as well as to share- holders, that the social and environmental impact of firms can be measured in much the same way as the financial impact and that these individual measures can be aggregated to provide some- thing akin to a societal profit or loss. While those adhering to the strict shareholder value version of corporate governance, such as the editors of The Economist, may take issue with the first of these claims, in no way could they be regarded as novel, according to Norman and MacDonald, since they have been at the heart of the CSR agenda since the 1980s. The more important criticism, how- ever, lies in the measurement aspects of 3BL. First, there are no known, universally accepted standards for measuring an aggregated bottom line, and given different ver- sions of ethics in business, it is probably not theoretically possible. The movement known as SEAAR, social and ethical accounting, auditing and reporting, which is probably the most rigorous body in this field, has influenced a number of standard-setting bodies in the past few years, including the Global Reporting Initiative, SA 8000 Workplace/employee relations, AccountAbility 1000 Stakeholders, ISO 9000 Organization and Governance standards (see Fombrun, 2005), but would not claim to have provided an aggregate measure of 3BL. Their job has been to identify per- formance indicators of the social and ethical behaviour of com- panies and to find ways of auditing it. However, this is some way short of providing valid and reliable aggregate measures of CSR, which is the novel claim of 3BL. Indeed, to be plausible, the con- cept has to remain vague, qualitative and generalized; the closer one gets to specifying a measure of 3BL, the less plausible it becomes. 328 Corporate Reputations, Branding and People Management Part of the reasoning for this is the ‘apples and oranges’ argu- ment; there is simply no universal, common currency for equating financial performance with all aspects of social and environmental impact, or even one unit of social good with another, e.g. donating money to charity for food aid or donating money to education. So, is this a case of what is measurable isn’t always meaningful, and what is meaningful isn’t always measur- able? Another part of the reasoning is a more fundamental one and relates to our debate over different versions of governance and their moral stance. CSR and stakeholder theory, according to Norman and MacDonald, are largely premised on a theory of good: how does a business add value to the world? However, this is sometimes at odds with a theory of rights, which underpins the case for shareholder value. This concerns itself, as we noted, with whether individual rights are respected and societal obligations exercised in relation to these individuals. Thus, fulfilling obliga- tions to shareholders may not always have a net positive impact on society but it does respect their rights and discharge society’s obligations to them. From a rights perspective, it is not possible to say that maximizing three lines of promises to shareholders, employees and the public at large, as required by 3BL, is better than fulfilling one obligation to shareholders. Chapter 9 Corporate strategy, corporate leadership, corporate identity 329 Conclusions In this chapter we have looked at the corporate-level drivers of the links between HR, reputations and brands. The import- ance of the RBV was stressed and the role of leadership in turn- ing the clichéd rhetoric of the RBV – ‘people are our most important assets’ – into reality. Ultimately, this depends on lead- ership vision and on their interpretation of governance theo- ries and models. Among commercial organizations, there is something of a contested terrain between shareholder value and stakeholder theory, both of which would lay claim to strong moral and ethical bases. Shareholder value has the support of many neo-classical economists and those advocating a theory of rights, while stakeholder theory stresses the business case for CSR based on a theory of good. Currently in this battle of ideas, following the pall created by Enron, stakeholder theory is rapidly gaining ground as a philosophy for many large busi- nesses, and CSR has become big business. Some of this activity is directed at making money from socially responsible brands, but most is directed at building up social capital to create and protect their corporate reputations. The arguments from the right (spending money on CSR is wasteful of shareholder assets) and those from the left (CSR is a sham that leaves cor- porations even more free to dominate the world) are powerful. Our view, however, is closer to those advocating CSR as a way of reconciling business with society, though we are mindful of the problems of measurement such as the 3BL and some of the more cynical attempts to hide behind CSR in some quarters while exploiting and polluting in others. The core theme of the book is that reputations and brands are driven from the inside, which also applies to CSR, as both an outcome of business and as a new corporate identity for many businesses. Consequently, we are at one with the CIPD in argu- ing for greater understanding and skills among HR specialists in making CSR happen. However, it is really to the beliefs, pol- icies, strategies and actions of leaders and line managers that we have to look for guidance and action in creating more socially responsible organizations, as our Financial Services and GE cases have shown. We conclude this chapter with a good example from the UK-based Diageo, a company that has been prominent in CSR activities through corporate citizenship pro- grammes. Our thanks have to go to the authors of a very well researched case, Dave Bek, Ian Jones and Michael Pollitt, for allowing us to summarize their work in progress. 330 Corporate Reputations, Branding and People Management Box 9.3 Creating reputations by building social capital: Diageo’s Corporate Citizenship Programme Diageo is the global leader in sales of premium drinks, including high profile brands such as Smirnoff, Guinness, Johnnie Walker and Captain Morgan, formed in 1997 following a series of mergers. It sold some of its business, including Burger King and Pillsbury, to focus on beverages. Chapter 9 Corporate strategy, corporate leadership, corporate identity 331 As a company it has attempted to establish a connection between its cor- porate brand and product brands since 1997, though, according to Bek et al., it has had problems in doing so and in establishing a strong internal brand. In other words, it seems to have ambitions to become more of a branded house. An Economist article on the drinks industry noted an important contrast in this respect between Diageo and the number two in the industry, Pernod, which acquired Allied Domecq in July 2005. Pernod has a reputation for providing a great deal of local autonomy to its operations and brands (Economist, 2005c). The implica- tion of the article was that Pernod will remain a house of brands and that this strategy would be an important point of contrast between the two market leaders. However, this may be oversimplifying the case, since Diageo ‘can be conceptualized as a dynamic corporate entity, which is continually undergoing shifts with the substructures of its business through mergers, acquisitions, strategic alliances and sell-offs’ (Bek et al., 2005, p. 7). Diageo’s main markets are in North America, the British Isles and Spain (accounting for 75% of turnover), though it has other substantial ‘key’ markets in South America, Australasia, Africa, Europe and Japan, as well as smaller, ‘venture’ markets in other countries. Its Corporate Citi- zenship (CC) programme is at the heart of its marketing and branding strategy, along with involvement in local communities. Both sets of activ- ities are core to ‘creating long-term shareholder value’. Diageo aims to ‘build and enhance its corporate reputation, help build a sustainable business environment, build team spirit and build trust and the licence to operate with shareholders’ and is a leading company in community involvement. It was also one of the first to appoint a director of CSR. A key aspect of the Diageo’s approach to CC is that it is ‘owned’ by the main board and CEO. A CC strategy and policy committee has been established, which is chaired by the CEO and meets three times a year. Members of the committee are drawn from the company’s executive level. Also of note in this respect is the company’s intention to merge this committee and the Brand Committee, whose remit is to establish a strong corporate brand. Whilst there is a strong degree of corporate activity in this field, Diageo’s community programmes have arisen mainly from its acquisi- tions of businesses, which had a history of community involvement, such as Guinness in Ireland. Thus community involvement is embedded into the fabric of Diageo and in its day-to-day business operations. This 332 Corporate Reputations, Branding and People Management history of community involvement, together with the corporate-level, sen- ior leadership direction of the programme, and the merging of CC with corporate branding, indicate a serious attempt to integrate CSR into the strategic decision-making of the organization. Diageo’s CC activities are based on a policy of ‘responsible drinking’, to which a special fund has been allocated. In addition, community pro- grammes have focused recently on three areas – Skills for Life, Local Citizens and Water of Life. The company also puts resources into disaster relief, leadership programmes and poverty relief. New markets require different projects and the company is presently examining the Chinese market for suitable CC programmes. Projects can arise from different sources: through formal applications to a Diageo Foundation, a legally separate charitable body, for projects in the focus areas; informal requests; and key Diageo employees who wish to champion local or international initiatives. The work of the Foundation cannot support the commercial interests of the company but is designed to be complementary to its business, brands and people. A business case has to be made for funding. The Foundation aims to kick-start pro- grammes, provide advice and push out responsibility for these to local markets. It contributed about 3 million pounds to the total CC spend of 17.5 million in 2003/4. The company has also agreed a 1% of pre-tax profits allocation for community programmes, which is in line with best practice in other organizations. Diageo were ranked 24th among the FTSE top 100 for donations as a share of profits in 2003. The CC programme is varied in its content ranging from on-going 20-year support for ‘Tomorrow’s People’ totalling 20 million pounds, $200 000 disaster relief in Columbia, to providing senior executive time for voluntary organizations and employees painting a local classroom in a poor area of London. Following a strategic review, Diageo decided to concentrate on the themes of responsible drinking through alcohol edu- cation, Skills for Life, Local Citizens and Water of Life. Alcohol education is aimed at curbing the social problems of ‘binge drinking’ in the UK, dealing with drinking by minors in the USA, drink- driving in Africa and Germany, and training bar staff worldwide. The company has also developed a code for responsible marketing and is a leading member of the Portman Group in the UK, a body established to deal with alcohol abuse. Water of Life focuses on projects that demonstrate a commitment to water and effective sanitation, mainly in Chapter 9 Corporate strategy, corporate leadership, corporate identity 333 African countries. Since water is core to Diageo’s production processes, this is entirely consistent with its business aims. Local Citizens focuses on ways in which the corporation as a whole can support Diageo’s businesses in communities, such as providing matching funds to support young entrepreneurship programmes and relief operations following natural disasters. The Skills for Life programme aims to provide disadvantaged and unemployed people with help to find work or start new businesses. Diageo evaluates its community involvement programmes using the London Benchmarking Group (LMG) model, which it helped found. The model differentiates between different types of donations provided by companies: charitable giving and philanthropy (no regard for returns to business); community investment, which is focused and is intended to provide long-term gains to the company; and commercial giving, which provides direct payback to the company. The model is used to evaluate inputs against outputs by the Corporate Citizenship Company, which manage the LMG, to audit individual programmes and companies if they so wish. The data on Diageo over the period 2001–2004 show a move away from philanthropy to commercially-led programmes and to social investment (see Table 9.1, adapted from Bek et al., p. 15). Table 9.1 Community-led investments, 2001–2004 (£m) 2001 2002 2003 2004 Philanthropy 5.4 2.1 2.4 1.1 Social investment 8.2 12.1 11.3 11.8 Commercially led initiatives 1.6 2.7 5.3 4.7 Total 15.2 16.9 19.0 17.5 In addition to this financially independent evaluation, one of the authors of the case, Ian Jones, has established a quantifiable measure of how firms make themselves accountable to their communities. The criteria used in this comparative evaluation of companies are: ■ Use of a separate social report in the published report ■ Information easily linked to home webpage ■ The firm has explicit social values ■ The firm has a Foundation charity . profit and power’, his book’s subtitle. He cites the case of Sir John Browne, an icon of the CSR movement, and 324 Corporate Reputations, Branding and People. qualitative and generalized; the closer one gets to specifying a measure of 3BL, the less plausible it becomes. 328 Corporate Reputations, Branding and People Management