Corporate Social Responsibility: Mainstream or Sidestream?
Michael Prideaux, Director, Corporate & Regulatory Affairs, British American Tobacco
Tobacco Symposium & Exhibition, Kunming - China, 16th November 2004
In case any of you are not totally familiar with the tobacco business, “sidestream” is what comes from the tip of the cigarette, whereas “mainstream” is what the smoker actually inhales. I intend to show you how, at British American Tobacco, we have definitely decided to inhale Corporate Social Responsibility (CSR). Bearing in mind the example of former President Clinton, we never trust a man who says he doesn’t inhale!
Rather than just talking to you about British American Tobacco, always a subject dear to my heart, I thought it would be interesting to step back for a moment to consider why Corporate Social Responsibility is coming to the fore, before thinking about its relevance for the tobacco industry. I’ll then share some of the insights we are gaining from our own CSR journey.
In today’s world, we are facing increasing societal expectations of companies. There are also increasing demands for the reporting of a company’s socially responsible activities and an increasing prevalence of standards and codes of conduct. But, for the corporate sector, the potential benefits of CSR include improved reputation, improved competitiveness and better risk management. So, it’s not as bad as it sounds!
Although CSR is undoubtedly coming to the fore, it also has some very eminent critics. Here’s what Milton Friedman thinks of it: “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.” And recently, in the UK, the Institute for Economic Affairs (IEA) has published some wide-ranging criticism of CSR written by David Henderson. “Yet another fashionable notion that fails to deliver long-term benefits but distracts businesses from pursuing their proper and vital economic role” is how the IEA describes CSR in the introduction.
Henderson sees two main drivers of CSR, the globalisation debate and what he delightfully calls the “Global Salvationist” consensus. The first draws much of its strength from the idea that multinational businesses are now more powerful than governments, while the second draws on the endorsement, by governments as well as by elements of public opinion, of sustainable development as a goal for businesses rather than as a goal for nations, to which business can make its proper contribution. From British American Tobacco’s point of view, we would argue that both are false prophets, particularly the globalisation one.
That’s because it is based on an act of gross economic illiteracy, as has been well demonstrated by Martin Wolf in the Financial Times. The only way that you can make companies bigger than countries is to compare sales with Gross Domestic Product, which is a measure of added value, rather than sales. To get a truer comparison you need to deduct the cost of inputs bought from outside the company! Any company will obviously look much larger if measured by sales and if the cost of all the goods and services it buys in are excluded. So, properly measured, even Bangladesh, which ranks about 50th by GDP, is actually bigger than General Motors. Look, too, at how far down the list the likes of Shell and BP are at 61st and 62nd when properly measured.
Moreover, as Wolf also points out, even the weakest state can force millions of people to do things that most of them would probably rather not, such as paying taxes. As he put it, companies are civilian organisations that must win the resources they need in free markets. They rely on competitiveness, rather than coercion.
So much for the idea of globalisation as a driver of CSR. But what of the idea that it’s being driven by sustainable development as a suitable goal for business? This, it seems to us, is trickier. Sustainable development is fundamentally a goal for nations, for governments and for mankind as a whole. Businesses can of course contribute to helping achieve it and arguably have done so for decades, largely through their economic contributions and stimulus to innovation, wealth creation and rising living standards.
However, it is rather a worrying notion that companies could be seen as capable of solving all the world’s most pressing social economic and environmental problems. And some views about how business may contribute responsibly to sustainable development seem over-focused on philanthropy. If British American Tobacco has one key insight into CSR, it’s that it’s about how you make your money, rather than how you spend it. But I’m getting ahead of myself!
Probably the most significant factor in the increasing prominence of CSR is the very real interest that governments are taking in it. Indeed, it has been formally commended by the European Commission, with the approval of the EU Council of Ministers, while the new text of the OECD’s “Guidelines for Multinational Enterprises” is presented as a tool for promoting CSR. CSR has gained recognition not only at the UN Headquarters and in specialised UN agencies but also in the World Bank. In Britain, there is a Minister with responsibility for CSR while, from 2005, all British quoted companies will have to publish an Operating and Financial Review covering CSR in their Report & Accounts. It’s worth noting, in passing, that CSR doesn’t yet seem to be receiving quite the same degree of attention in the US, where the focus seems to be more on corporate governance. Maybe this is another example of US isolationism!
So, being pragmatic, it looks as though companies don’t have too much choice, at least in Europe. But I believe we can all get much more out of it if we see it for the opportunity it truly is, rather than taking it as something imposed by government, or as a response to some of the nonsense talked about companies being more powerful than governments as a result of globalisation or as being only about philanthropy. What if it’s actually about enabling us to demonstrate that our businesses themselves are sustainable? Moreover, by being sustainable we can contribute far more over time to governments’ and nations’ efforts to achieve less poverty, less environmental pollution and a better share of the earth’s wealth and resources for everyone.
This is why, in my view, CSR is particularly appropriate for the tobacco industry. Sure, to some people, the words ‘tobacco’ and ‘responsibility’ don’t belong in the same sentence. But, more constructively, as the former Bishop of Durham, who facilitated our first round of stakeholder dialogue in 2001/2 put it: “Do you want to enjoy the luxury of being right or do you want to do something useful?” It can be right for other controversial businesses too.
In a recent book on corporate reputation, Ronald J. Alsop, a Wall Street Journal editor, describes a company in the gambling industry in the US called Harrah’s Entertainment that has managed to forge a good reputation with regulators. It refuses to cash welfare or unemployment benefits, displays ‘Helpline’ numbers for compulsive gamblers and respects requests from addicts who have asked to be denied access to its casinos. It also avoids promoting gambling to young people by not advertising in certain media and by not licensing its logo on children’s clothing, toys and game equipment. Of course, Harrah’s also promotes its positive impact on local communities but I doubt that it would be getting as much attention if it wasn’t already addressing the mainstream issues inherent in how it makes its money. The paradox of CSR for controversial businesses is that it can indeed be relevant provided that they avoid the trap of focusing only on philanthropy. Charitable donations are an important part of the meal but they’re not the main course.
Let’s now turn to some of the insights British American Tobacco is gaining from our continuing journey. For us, the pace really quickened once we became a freestanding tobacco company in 1998. We decided that the main reason our business was relatively lowly valued was that it simply wasn’t seen as sustainable. Of course, we were also contending with the full force of the ‘Decade of Demonisation’ in the United States but we believed that would run its course in the end and it still stood to reason that a business seen as sustainable ought to be a more highly valued one.
The challenge is to balance our commercial objectives with the reasonable expectations of society. We’ve often described this process of engaging constructively with society as “bringing the outside in”. This influences the way our business behaves, i.e., “what we do”, which has to be consistent with how we communicate, i.e., “what we say”. Put another way, if you say one thing and do something else, your reputation will suffer.
With hindsight, we made two key choices. The first was to develop a myth dispelling website and the second was to put facilitated dialogue at the heart of our approach to CSR. The idea was to be able to say to the stakeholders we were inviting to dialogue that if they couldn’t yet trust the company, they could at least trust the process. Our stakeholder dialogue is now sponsored by the Institute of Business Ethics and facilitated by MORI. It is also verified by Bureau Veritas.
And our website? Well, for the last two years it’s been ranked the best in the FTSE by the leading independent survey published in the FT. I can safely say, whether in dialogue or on the website, that people are surprised by our candour.
Another important early initiative was developing our International Marketing Standards. We launched them together with two of our largest competitors and they impose considerable restrictions on us. Advertisements, for example, can only appear in printed publications where 75 per cent of the readership are adults and they mustn’t imply that anyone’s success is enhanced by smoking. Moreover, we voluntarily withdrew from TV and radio in those parts of the world where it was still permitted and will exit from Formula 1 sponsorship at the end of 2006.
Perhaps the most surprising thing from our first round of dialogue was the questions we faced about our Business Principles. What were they? Well, until then, it had never occurred to us that we needed an explicit set of Business Principles. But given how little stakeholders knew about us and about our views on smoking and health, maybe we shouldn’t have been surprised. We proceeded to develop our Business Principles and the Core Beliefs that underpinned them internally, before validating them externally in the second round of dialogue. In this year’s dialogue, we have been trying to identify where we may be falling short.
Our Business Principles, Mutual Benefit, Responsible Product Stewardship and Good Corporate Conduct, can probably be thought of as a modern version of the famous Johnson & Johnson credo. They express, to our managers around the world, how we expect our businesses to be run in terms of responsibility and we have set up a Governance system at local, regional and PLC level in order to ensure that our companies around the world really are aligned with them. Indeed, one of the most powerful signals we sent was to set up a Main Board CSR Committee, right up there along with the Audit, Remuneration and Nominations Committees.
At the PLC level, we have also developed a Framework for Corporate Social Responsibility. This helps to focus our efforts by suggesting areas where we should take the lead, areas where we need to cooperate with others and areas where, frankly, others should take the lead. We recognise that these won’t necessarily be the same in all parts of the world but we also believe that the approach can help to discourage over-enthusiastic stakeholders from expecting us to do everything. Youth smoking prevention is a good example. We should take the lead in ensuring that our marketing activities are focused on existing adult smokers, should share the burden of preventing under-age people from buying cigarettes with retailers and should probably leave education about the harmful effects of smoking largely to others. If this approach was applied to sustainable development, some practical limits to what businesses, as opposed to governments, can sensibly be expected to do might start to emerge. In our view, sustainable development is far too important and wide-ranging to be seen as something business can in any way achieve alone and must be addressed through partnerships and by all contributors in society. You can see examples of our partnership with retailers on this slide. We can provide the communication materials but only the retailer can actually ask for the proof of age.
We also need a partnership approach to promote balanced solutions in public smoking. There are many good solutions to banish the smoke but not the smoker – such as better ventilation, smoking and non-smoking areas and letting restaurants and bars choose what they and their customers want, suiting solutions to the profile of the customers they serve.
Our companies are active in supporting and advocating such solutions, particularly in partnerships with the hospitality trade. You can expect to see us becoming yet more active around the world if calls for unreasonable bans do spread. One company, or one industry, can’t achieve much alone. In making the case against draconian smoking bans, it is good to see a strong voice emerging from the hospitality industry, pointing out the economic damage to their trade and calling for balance.
In Canada, where 5 million tobacco consumers have so often been sidelined and ignored in regulation, our company is helping to enable a new online smokers’ association, My Choice, where consumers as citizens and taxpayers can start building their voice.
In the UK, retailers are a major voice in calling for action on illicit trade, and are giving tremendous support to programmes that we have helped to shape and fund, to block underage sales of many age restricted goods, including tobacco.
We report on our dialogue with our partners and others through our Social Reporting process which now takes place, not only at the PLC level but in 34 markets covering two-thirds of our sales volume. In general, we have found that dialogue continues to extend in terms of both its inclusivity and in the scope of the issues covered. Although our companies still continue to experience reluctance to participate from the tobacco control and public health communities, stakeholders from these groups have taken part in at least some countries.
This goes to the core of the opportunity that CSR presents to a company like ours. Despite the pre-eminence of governments that I referred to earlier, we have to face the fact that pressure groups often articulate and shape the public mind more effectively than political parties, while pressure groups are actually the people that appear to have an influence that often seems greater than governments. Their influence over our licence to operate is really the power of claiming the right to veto. Our answer, through dialogue, is to provide them with the opportunity for a more constructive interaction. The challenge to them is that if they continue to spurn the opportunity to engage constructively, and in some cases to indicate to whom they are accountable, they must eventually lose their own licence to obstruct.
But that’s in the future. There’s no doubt, however, that the more immediate results have been encouraging too. At the formal level, Responsibility is now seen by British American Tobacco as an integral part of our strategy for building shareholder value, along with Growth, Productivity and being a Winning Organisation. Research shows us that over 80 per cent of a sample of UK investors who know at least a little about us in 2004 believe that we are sincere in our commitment to corporate responsibility, while 70 per cent of them actually think that we are making some progress.
We have also won the inaugural PriceWaterhouseCoopers Building Public Trust Award for Stakeholder Communications and the Electronic Media Category in the Sustainability Reporting Awards run by the UK Association of Chartered Certified Accountants, following our Award for the Best First Time Social Report in 2003.
In 2004, we were again placed in the Premier League of companies scoring over 95 per cent in the Business in the Community Index of Corporate Environmental Performance and Engagement. We are also the first tobacco company to be included in the Dow Jones Sustainability World Index, a position we’ve now held for three successive years. Only last month, we won another PriceWaterhouseCoopers Building Public Trust Award for what the judges called our “bold and innovative” report on Corporate Governance and
Executive Remuneration in the 2003 Annual Report.
So it’s already working better than I ever thought possible and faster too. Less formally, we have seen an important uplift in the way our employees feel about our business. Articulating our beliefs and being seen to stand up for them works for everyone. That’s because CSR is actually part of the corporate sector’s contribution to transparency and because it can help all of us to answer the legitimate concerns that are often hidden behind an anti business agenda, including about how business in partnership with other contributors can help to achieve sustainable development.
Two good examples are the British American Tobacco Biodiversity Partnership and the Eliminating Child Labour in Tobacco Growing Foundation. The Biodiversity Partnership involves four conservation NGOs: Earthwatch Europe, Fauna & Flora International, The Royal Botanic Gardens, Kew and the Tropical Biology Association. It not only contributes to biodiversity through a number of programmes, such as the Flower Valley Conservation Trust in South Africa, but enhances British American Tobacco’s own ability to conserve and manage biodiversity.
The Eliminating Child Labour in Tobacco Growing Foundation was established with the International Tobacco Growers’ Association, the trades unions in the tobacco sector and the major international tobacco companies. The model has been copied in its entirety by the cocoa sector. That’s leadership!
It really comes down to a very simple paradox: you can’t contribute much to sustainable development unless you ensure that your own business is sustainable. CSR is the way to a sustainable future because it can help us to align ourselves with society’s reasonable expectations.
Far from being a distraction, it improves competitiveness, influences reputation and integrates important aspects of risk management into our whole approach to business. For British American Tobacco, it’s as mainstream an activity as growth, productivity and being a winning organisation.
British American Tobacco