10th Maxon Lecture
A Corporate Responsibility Tradition: Creative Approaches, Rewarding
I am honored to be with you today and to have been chosen to deliver the tenth annual Maxon lecture. I spent many happy years here during my university days and am pleased to be back, this time to talk about corporate social responsibility, a subject of great importance to my family and our company, since its foundation in 1926.
The American artist Paul Paulnik once said: “creativity perpetually invents itself”. In the age of global capitalism we see this in the complex financial arrangements that triggered the global economic crisis, and need it in the regulatory mechanisms which have yet to be designed to respond to the problem. We see it in the fast moving technological developments in the IT, manufacturing and health sectors, but not where we need it most, in ensuring equitable, sustainable growth for all citizens of the world.
Creative approaches do in fact yield rewarding outcomes. But for whom, and what is the reward?
To answer this question, we need to define a few terms and concepts. Milton Friedman, in writing about corporate social responsibility, defines “externality” as “the effect of a transaction on a third party who has not consented to or played any role in the carrying out of the transaction”. In his book “Capitalism and Freedom” he says: “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” He believes that any other activity would result in spending investors’ money on causes they did not consent to and which do not relate to the core business of the company.
Has Friedman’s absolutist approach ended the discussions? Not really. There is a general consensus on the issues of “externalism” and “rules of the game”. However there is still discussion on how to create the best value added and how to generate the best rewards.
It used to be defined as “doing good to do good”. This is the tradition that the third generation of my family inherited from our grandfather, the late Vehbi Koç, who established the Koc Group of companies some 80 years ago. He summed up his patriotism, sense of responsibility, wisdom and vision in one simple statement: “I live and prosper with my country.”
Unquestionably, the issues of his day did not have the global implications that they have today, nor were the settings, relationships, or policies as interconnected. For example, when he set up Turkey’s first automotive company, he in fact established the first private manufacturing industry in the country. When he set out to institutionalize his companies under the roof of a holding company and held an IPO, he essentially established the national capital market. Similarly, by institutionalizing his philanthropic work under the auspices of a Foundation, and struggling with the government for two decades to establish the legal framework, he paved the way for other businessmen who wanted to institutionalize their social investments.
Today the Vehbi Koc Foundation operates in 3 major areas: education, health, and culture. We have established 17 public schools, a university, a hospital, 3 museums, awarded tens of thousands of scholarships, and spent more than 500 million dollars, most of it in the last decade.
In all this work, Vehbi Koç was being proactive in a creative way. He did not wait for the right conditions or the legal framework to act responsibly. He was weaving the threads of economic and social development.
When I signed The United Nations Global Compact on behalf of my company in 2006, I was sure of something very important. The universal principles in the areas of human rights, labor, the environment and corruption embodied in the Global Compact were an integral part of the way we did business since the day our company was founded. The Global Compact is a contemporary framework for businesses to follow on a voluntary basis, and includes a commitment to continuous progress in the area of social responsibility
Indeed, social responsibility works best as a tradition, in the broadest possible sense, starting with Friedman’s “profit seeking” activities and continuing through to establishing a national economy which would include weaving the threads of a developing society. But even that broader understanding of a nationalistic approach is not enough to meet the needs of our day. The planet earth is giving out warning signals arising from the “externalities” of human activity.
Long before governments became concerned about population growth and the environment, as a businessman Vehbi Koç identified these as two critical issues for the development of a healthy society. In the early seventies, he launched campaigns that brought together public institutions, international labor organizations and industry. These efforts more than 30 years ago reflected his awareness of what is now called stakeholder engagement. And he never stopped building on this philosophy. Over the years he set up separate NGOs to address family planning and health, education and the environment
What was even more revolutionary in his approach was that in establishing his foundation, he tied its endowment to the shares of the Holding Company. He believed that the foundation and its work would only be sustainable if tied to a basket of shares of many companies striving to adapt and compete in a changing world. Many of you may recognize similarities between my grandfather’s approach and what is now called the modern portfolio theory .
Did he question whether or not he had to provide this public good as a businessman? He did not. Did he try to find a business rationale for it? He did, by saying “I prosper so long as my country prospers.” He understood that a more educated, healthy public was the reward of his creative approaches: in short, it was a win-win situation. Two generations later, we continue to support the third sector because we recognize the value it brings to democracy and to social development.
Although Vehbi Koç understood the importance of CSR 70 years ago, the search to justify businesses acting in a socially responsible manner continues today. In addition to the obvious benefits of behaving in a socially responsible manner, increasingly managers today are seeing that being a better corporate citizen is a source of competitive advantage. This is also the conclusion of some contemporary thinkers on the subject , who believe, however, that there are only certain circumstances when corporations should make social investments. According to this school of thought, there are six circumstances which would facilitate the provision of goods and services as part of corporate social responsibility. These six circumstances are:
-when the law requires companies to conduct socially beneficial activities,
-when there is no extra cost to doing so,
- when socially beneficial actions bring cost advantages,
- when they generate additional revenue or generate goodwill,
-when they might deflect or influence future regulation or deflect enforcement of existing regulation,
- and finally, when they might help to spur regulation, which would provide a competitive advantage over less adaptable companies.
In developed economies, it’s easier to identify success stories and best practice benchmarks. In developing economies, the situation is somewhat different. It is much harder to exercise the self discipline required to practice higher standards of doing business in conditions where often,
•minimum legal requirements are not met or enforced, nor the infringement penalized;
•there is almost no public pressure in support of the action;
•and those who practice CSR are not fully recognized.
For this reason, I would argue that those who practice and advocate good corporate citizenship in less mature, less receptive markets qualify as true pioneers.
These pioneers invest substantial short and long term resources in conditions where returns are not quantifiable, and where little or no upside exists for going beyond Friedman’s narrowly defined scope of doing business.
I am proud to say that we have been pioneers in economic and social development in Turkey. We see that we can light a spark through creative approaches and deliver models which leverage the power of our people, supply chains, brand and reputation and international reach. We try to use this as leverage in our CSR projects. For example, we have two major projects that do exactly that. Our “For My Country” campaign takes social citizenship to the local level by mobilizing our extended business network in all 81 cities in Turkey to identify and address important local issues. The campaign has generated almost 400 projects in its first two years. Last year we decided to create scale by focusing all this energy under the theme of environment to help address Turkey’s serious erosion, climate change and wildlife preservation problems. In consultation with the Ministry of Environment, we identified locations in each of the 7 geographic regions of Turkey where there was an urgent need for preservation and set out to create 7 forests with 700,000 saplings.
If you analyze our projects in the narrow confines of the six circumstances which some thinkers believe justify investment in CSR, you might conclude that our projects were not justified.
So what good does it do? Is it really doing good just for the sake of doing good? Perhaps. But this is only part of the answer. With these campaigns, we aim to create an understanding of citizenship that is new here;
∞one that encourages citizens not to wait for the government to solve all problems;
∞one that supports democracy, and
∞one that encourages a proactive approach to common problems.
A second example of a project designed to address a serious social issue targets education. It is an excellent example of how CSR projects can deliver win-win outcomes, for the company, the industry and the country. Our “Vocational Education a Top Matter for the Nation” campaign addresses three problems: a shortfall in the number of qualified workers for industry, high unemployment, and development of the manufacturing sector. Over the years, the appeal of vocational education in Turkey has been steadily decreasing, partly because it was not seen as “cool” to attend a vocational school. Ironically, in a country with a chronic unemployment problem, this perception actually harmed the students who did not go to vocational schools. Statistics show that graduates of vocational high schools who did not go on to university were more successful in finding jobs than ordinary high school graduates. Statistics also show that girls are 9 times more likely to drop out of the education system than boys are. Thus, at the same time as vocational school enrollment was dropping, industry needed ever more qualified workers to achieve increases in productivity, which in turn is essential for the country’s economic development.
We set out to increase awareness by supporting 8,000 successful students from poor families. The program is in effect throughout the country and equally balanced between boys and girls. In addition to providing scholarships, it organizes field and factory trips, internships, national competitions, and provides the necessary physical infrastructure. But perhaps the most valuable thing it does is involve our companies’ employees as mentors to the students, most of whom lack a role model in their lives. We work closely with the Ministry of Education.
With these types of projects this may be as far as we can go with the current economic paradigm. Can business overcome global poverty, inequality and save the planet? The answer is unquestionably “No” if it means “business, on its own”. It is not in the interest of profit-seeking businesses to internalize externalities because this would make it impossible for them to compete with businesses that do not.
However, in the fast-paced New Economy, there is some room for optimism though tinged with a certain degree of skepticism . While on the one hand there will be opportunities to develop new businesses by addressing social and environmental concerns, there will also be pressures to deliver financially. However, these corporations will not be sustainable unless they are either economically strong as a result of first mover advantages or leveraging market power, or are supported by institutional arrangements that guide and stabilize progressive market norms as they emerge.
And this brings us to the issue of collective action.
The issues of the day require coordinated and collective action. Only if the right global policies and local incentives are in place will business play its part in delivering the desired outcomes.
Urgent action and strong political engagement is needed on poverty, rapidly declining biodiversity and water supplies. In fact the current financial crisis begs the question of how economic growth will be restored without harming the already fragile environment. We need to take a closer look at the existing political economy taking into consideration the underlying economic model.
We as global citizens, and you as emerging business leaders need to push the creativity button to create a more intelligent and sustainable growth. This new approach would chart a paradigm shift for consumers, businesses and policy makers.
This shift is unquestionably beginning as conscious customers and employees question the products and services they produce and consume. For our part we are trying to develop ever more environmentally friendly products. Some of these products have even won awards for efficient energy or water consumption. We have completed and secured licensing for 12 research and development centers. This is just my company and, there are many more companies out there who are also taking part in this shift. The shift is happening with initiatives such as the Kyoto Protocol and its tools like the Clean Development Mechanism. The shift is happening with the Global Compact, which Kofi Annan described as the joint values of the emerging global community. The shift is happening with a globally growing green market that stood at USD 1.3 billion in 2007.
We can find more examples that when brought together indicate a shift leading to a paradigm change. The pace of this change will be determined by the steps taken to establish a framework that will address the issues of economic development for the world’s less advantaged. We need to be creative. As Mr. Clinton recently said at Davos, the world has become an unstable, unsustainable and unequal world. To motivate the business world to become even more creative in CSR work they need recognition whether in the form of investors who favor responsible management, or qualified employees who seek out companies they would be proud to work for, or customers who value products and services that have been produced responsibly. As investors, employees, or customers you need to do your part too. You have every right to play a dominant role in shaping the future playing field and defining the rules of the game for the world’s major actors.
In conclusion, I would ask you: is it not a great reward to have a stable, sustainable and equal world? Having heard about the work my company has been doing over the past 70 years, I think you know our answer is an unqualified “Yes.”
Thank you.