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Putting CSR at the Center of Corporate Operations

Tags: CSR , Business Management , Corporation , Civil Society , Globalization

Takubo, Yoshihiko

January 28, 2016

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Companies exist to fulfill certain social responsibilities and offer value for society. From that standpoint, “corporate social responsibility” is a concept that lies at the heart of corporate management. There is thus no need to talk about or undertake CSR initiatives as if they were something special.

This is a notion that managers, including in Japan, have begun to appreciate in recent years, but understanding this intellectually and implementing it in day-to-day operations are two different things. Many companies still cling to an old-fashioned image of CSR as an extension of corporate philanthropy, divorced from their main business activities.

A New Way of Thinking

When people talk about CSR in Japan they often refer to the principle of sanpo yoshi—a business philosophy among the feudal merchants of Omi Province (now Shiga Prefecture) that sees the key to success as being to offer products and services that are “good for the buyer, good for the seller, and good for society.” Ensuring benefits for all three parties is an excellent idea, of course, and the concept’s relevance remains undiminished today. Many factories across Japan, for example, support their local communities through ongoing employment and a range of activities that contribute to regional development, and some companies have established astonishingly deep and cooperative ties with the community. Many Japanese companies, for instance, went out of their way to provide relief in the wake of the March 2011 Great East Japan Earthquake. Their deep concern for local areas deserves special mention.

That said, sanpo yoshi should not be used as an excuse for failing to give greater thought to the needs of corporate management today. We should recognize that the number and kinds of corporate stakeholders have greatly increased since the days of the Omi merchants and that there is need to respond to such profound changes. Great influence on corporate governance is now exerted by nonprofit and nongovernmental organizations, as well as by investors who look for socially responsible corporate management. Global expectations have also expanded, as exemplified by the launching of the ISO 26000 guidelines by the International Organization for Standardization and the Global Compact’s Ten Principles by the UN Secretary General. Companies must henceforth think about their relationship with a vast array of stakeholders and give attention to balancing their needs.

Case Study: Akebono Brake Industry

Akebono Brake Industry engages in a variety of activities based on its view that employees represent important stakeholders. Automotive brakes are extremely important products, but they are also rather inconspicuous. The company thus promotes in-house branding activities so that employees can take pride in their work, helping them to feel that any social value the company creates emerges from them.

For 50 years, the company has operated a Vocational Scholarship Program to support young people who wish to become nursery school teachers, enabling them to attend junior college while working at the company’s factory to support their studies. Akebono also employs many people with disabilities at a special subsidiary.

Financial circumstances often force companies to scale down or cut traditional CSR projects. Akebono has not only sustained the projects it considers important but has turned them into the company’s strengths. Such initiatives may not be easy for other companies to emulate, but they are an excellent example of Japanese-style CSR.

Initiatives labeled as being CSR at Japanese companies have overwhelmingly been in the fields of environmental protection and compliance. This is not surprising, for many companies have learned hard lessons from problems caused by pollution in the past. Japan’s manufacturing industry, in particular, now has world-leading environmental protection policies, which is an admirable achievement. Compliance policies are also of crucial importance, without which companies will be unable to survive. Companies understandably place as much emphasis on compliance as on their chief operations that generates value for them.

As a consequence of the narrow focus on these two areas, though, Japanese companies have failed to adequately address the more recent demands of global society. They have, for example, frequently been cited for labor management issues at their second-tier and third-tier contractors.

Companies with global operations, in particular, need to be aware of differences in social conditions and development levels in each region and must take note of the speed with which these conditions change. To fulfill their social responsibilities in an ongoing manner, companies must look to the medium and long term and put CSR at the center of their management strategy. This will require a new organization and enhanced information gathering capacity to integrate CSR into management policy. In short, companies must change the way they think about CSR.

Case Study: Sompo Japan Nipponkoa

Many Japanese companies still equate CSR with environmental protection and compliance. Sompo Japan Nipponkoa, though, has identified five “material issues” and is implementing a variety of initiatives, despite the fact that insurers—compared to manufacturers—face greater obstacles to implementing multifaceted CSR. These five issues were arrived at through a unique process consisting of (1) analysis and implementation of a questionnaire survey based on the ISO 26000 guidelines for social responsibility and (2) dialogue with experts. Sompo Japan actively seeks opinions from outside the company because it is painfully aware how easily organizations can become rigid in its thinking when left on their own.

The company also makes effective use of key performance indicators and the PDCA cycle in its CSR. It pays close attention to developments outside the company and uses KPIs to effectively manage those initiatives. There is much other Japanese companies can learn from Sompo Japan’s example.

Integrating CSR into Medium- and Long-Term Strategy

For companies to continue fulfilling their unique responsibilities in an increasingly complex society, they must adapt to changing times, constantly asking why, for what, and for whom they exist, and have a deep understanding of themselves and their meaning in society, questioning what strengths they can draw on to expand their business and offer greater value.

Companies must obviously confront these weighty issues when discussing their management strategy. But because most companies conceptualize CSR as being divorced from such fundamental questions, employees—that is, the stakeholders closest to management—see little meaning in their companies’ conventional CSR activities. These measures often have no relevance to the company’s strengths and are implemented simply because other companies are doing so. It is little wonder that many of them are discontinued after a time and fail to produce any significant value.

Said another way, compliance should be considered a given when discussing CSR; initiatives must, as a matter of course, be advanced in accordance with a corporate strategy that reaffirms the raison d’être and inherent strengths of each company. This is the gist of what putting CSR at the center of corporate operations means. Activities that have a limited or no relationship to a company’s operations can happily come second. Incidentally, I have authored a study of exemplary relief efforts organized by companies following the March 2011 Great East Japan Earthquake. Even though these companies were operating under emergency conditions, they still made full use of their own strengths. That is surely a testament to the importance of putting CSR at the heart of corporate operations.

There is, however, a trap here. A company might declare that it is already fulfilling its corporate social responsibilities through its main business operations and that there is no need to further consider, expand, or develop initiatives aimed at responding to society’s needs. A company’s main business no doubt constitutes the fundamental value it creates for society, but there is also a need to react to rapidly evolving social trends, sustain and improve the company’s strengths, and continue meeting the challenges of a competitive market.

From this viewpoint, it becomes obvious that CSR is inseparable from a company’s medium- and long-term management strategy.

Private companies, by their very nature, must obtain short-term profits as well, so corporate priorities do not always align with the longer-term needs of society.

In many cases, though, meeting such needs can become business opportunities. A number of Japanese companies moved into Asian markets 20 to 30 years ago to ascertain latent social needs, putting them in a position to offer solutions as the needs slowly became apparent. In this way, they were able to expand their business in step with the evolution of the local community. Becoming part of the community and winning people’s trust and loyalty are tasks that take time—putting them at odds with demands for short-term profits. That is all the more reason for companies to turn CSR into an integral part of their longer-term management strategy and to think about how they can fulfill their responsibilities in the societies in which they operate.

Giving attention to the longer-term needs of society also has the benefit of inspiring innovations in anticipation of those needs. Excellent examples of technologies that have already been or are soon expected to be commercialized to address social issues include eco-friendly hybrid cars; compact automobiles with significant improvements in fuel efficiency; new drugs to treat AIDS and other diseases; robots to deal with major accidents, such as in the wake of the Tohoku earthquake; more reliable communication networks; factories that have less impact on the environment; and simpler, cheaper medical devices.

Case Study: Kirin Group

The Kirin Group actively implements a CSR program called “one action, two values,” under which each initiative must simultaneously produce value for both society and Kirin’s own business. This may not sound very unusual, but it is much more than just a slogan at Kirin, as employees are called upon to clearly indicate in company documents what social value the action is intended to engender, ensuring that the program leads to real results. There are many examples of how this concept has created social benefits, including the development of Kirin Free—a nonalcoholic, beer-taste beverage—to help eliminate drunk driving; improvement in the environmental sustainability of Sri Lankan farms producing tea for Kirin’s Afternoon Tea beverage; and active use of fruit from areas hit by the Great East Japan Earthquake for a shochu cocktail. As these as examples show, the “two values” concept has spawned new innovations. By compelling employees to be constantly aware of the need for social value creation, Kirin has been successful in achieving this goal. The food industry is at the mercy of changing consumer preferences, and new innovations may quickly fall out of favor, but Kirin’s program is nonetheless an excellent example of how CSR initiatives can create opportunities for innovation.

For companies doing business in many different parts of the world, CSR is an issue that is integrally linked to their globalization efforts. “Environmental regulations are decided by local governments and authorities,” a CSR manager at a Japanese manufacturer once told me, “while corporate activities span national borders. When making similar products in different countries, companies can lower their standards in countries where laws are lenient to save costs or maintain uniform standards in operations worldwide. Lowering standards could turn out to be a very costly decision, though, if an NGO in a different country points this out, leading to a boycott of the company’s products.”

This is an issue that arises from the gap between the legal requirements of individual countries and the demands of society at large, and it is something that all companies operating in multiple markets need to contemplate. A company choosing to adhere to its own standards around the world may want to reconsider its presence in a region with cheap costs if it hopes to avoid major disruptions to its operations (inasmuch as the ISO 26000 guidelines assign companies responsibility for their entire value chain). These are issues that companies should address not in an ad hoc manner but as part of their longer-term survival strategy and in line with their core management policies. Environmental and other policies have had—and will continue to have—a huge impact on the structure of industry.

CSR as a Management Tool

Generally, as a company grows so does its sphere of operations and its geographical scope. This can make mutual understanding and information sharing more difficult. Department policies are implemented in isolation of one another, as a result of which a full understanding of the company’s operations becomes harder to ascertain. In such a situation, companies are wont to say things like, “We do all kinds of CSR”—the reality being that the full range of CSR-related information acquired by the company remains totally underutilized and unintegrated. This is particularly prevalent among companies with global, diversified operations, with headquarters having little idea of the initiatives being taken by local branches.

Some companies are taking steps to mitigate the inevitable weakening of a shared outlook as a company grows by conducting employee surveys, the results of which are used to identify the issues on which the company should focus. Such companies, though, are few and far in between.

Looking at the situation within companies, as revealed by the responses to the Tokyo Foundation’s questionnaire survey on CSR, many companies have a full assortment of initiatives to address environmental issues but leave other CSR issues to the discretion of individual departments. CSR departments tend to be small, and their effectiveness is frequently determined by the individuals who happen to be in charge. This is what happens when CSR does not lie at the center of a company’s operations.

The result is not only that in-house information remains underutilized but that companies are unable to collect and analyze information regarding the needs of domestic and global society and approaches to meeting emerging agendas.

Case Study: Itochu Corp.

Like other general trading companies, Itochu Corp. is involved in a very broad range of businesses and has operations scattered around the world. These features and today’s rapidly changing business environment make it extremely challenging for the company’s CSR department to collect all the information it needs on its own. The solution it has adopted, quite reasonably, is to have employees with knowledge of conditions on the ground provide such input. Employees of trading firms often have an interest in helping solve social issues in developing countries and are actively involved in community initiatives—and those at Itochu are no exception. So the bottom-up approach to identifying CSR initiatives is in close alignment with its actual operations. This, though, does not guarantee the success or continuity of those projects. Underpinning Itochu’s current CSR activities is the company’s founding philosophy and corporate culture nurtured over many years, as well as the great degree to which these principles have permeated through the company.

Meeting the Expectations of Global Society

One important expression of what global society looks for from the corporate sector is the 1999 UN Global Compact, which sets forth 10 principles that companies are expected to uphold. Companies pledging to operate in accordance with these principles receive certification from the United Nations, which can have such practical benefits as inclusion in socially responsible investment indices. As of January 2016, though, only 227 Japanese companies have declared their participation. With so much talk of globalization, more companies should surely show interest in embracing these principles.

Another set of guidelines is ISO 26000 covering such issues as governance, human rights, labor practices, the environment, fair business practices, consumer issues, and community involvement and development. It places great emphasis on the value chain and applies not just to the company itself but also to a broad range of areas affected by its policies and business activities. In other words, the company is called upon to take responsibility for everything in the value chain, both upstream and downstream. There have been cases of products being refused entry into Europe, for instance, because certain components used by Japanese manufacturers did not meet EU environmental standards.

The business activities of many companies, meanwhile, continue to expand, and this has dramatically heightened the risks of companies confronting unexpected issues due to their not being aware of various rules and regulations and realities on the ground.

A recent example is the requirement introduced in July 2010 by the US Securities and Exchange Commission for listed companies to report any use conflict minerals from the Democratic Republic of Congo, the aim being to cut off funding sources for armed groups engaged in the country’s civil war. In response, one corporate group set a policy on dealing with conflict minerals, publicized it on their website in October and, in effect, declared that they would no longer use those minerals. What this global company did was to fundamentally rethink its supply chain to facilitate a resolution of a regional conflict in the face of growing international concern about and calls for the business community to address a deepening human crisis.

Corporate activities, in other words, are being affected by developments that cannot be neatly categorized into such conventional notions as market, competition, and suppliers. As mentioned before, companies must monitor global CSR developments and form their strategy accordingly from a medium- to long-term perspective. This, in essence, is what globalization is all about; Japanese companies must keep abreast of what their ever-diversifying stakeholders are doing and prepare to meet the needs of global society. These surely should be the core tasks addressed in a company’s management strategy.

Case Study: Takeda Pharmaceutical

The pharmaceuticals industry is led by giant multinationals with turnovers in the trillions. Their operations span the globe, and cross-border M&As occur with great frequency. The biggest players are based in Europe, a region also at the forefront of CSR initiatives, so Japanese pharmaceutical companies, including Takeda, must remain alert to the diverse needs of international society and the standards being set by the sector’s top companies. Pharmaceutical firms have close ties with local communities and with NPOs and NGOs that function as watchdogs, and they also deal with drugs, which can have life-or-death consequences. This is why CSR must be at the center of their operations and management strategy, inasmuch as CSR involves addressing the needs of multiple stakeholders in society. Takeda’s initiatives can be considered a model not just for other pharmaceutical firms but also for all Japanese companies operating globally.

Securing and Developing Human Resources

Lastly, I want to touch on the meaning CSR has in Japan today. Many believe that the Japanese people’s values underwent a change following the 2008 global financial crisis and the 2011 Great East Japan Earthquake. Young people in their twenties and thirties, in particular, are highly aware of social issues, and many students devote considerable time to volunteer and other nonprofit activities. A heightened interest in social issues is something I personally feel when interacting with university students and young businesspeople. When students look for potential employers, they no longer apply just to popular companies but also to small NPOs. Indeed, many NPOs receive an incredibly large number of resumes. This is a development whose significance corporate managers should carefully consider.

A desire to contribute to society is especially strong among the most outstanding students. This may be a consequence of the financing doors that Internet-mediated methods like crowdfunding have opened.

Companies must realize that attitudes are shifting. They must adapt their corporate strategies to create space in their business for young people who are oriented toward social contribution. So from the perspective of human resources recruitment and development as well, CSR should be given a central place in the corporate management agenda.

Attracting outstanding students and offering them opportunities to work for the good of society will require that companies reaffirm the social value of their business operations, put this down into writing, and repeatedly communicate this message. They must explain how, why, and for whom their company exists, what their strengths are, how they are undertaking their business, and what values they are creating. To repeat: companies exist because they engender social value and fulfill responsibilities to society. To continue growing in a changing world, companies would do well to reaffirm this basic truth.

Case Study: Dentsu Inc.

Dentsu’s “Labs” program ingeniously gives self-motivated employees space to address social issues head-on under a highly flexible framework, and this has no doubt brought significant benefits in the recruitment and development of human resources. These Labs enable relatively young employees to play prominent roles, irrespective of their position in the company structure. So it is easy to imagine how this can help nurture future leaders for the company.

As Japan’s leading advertising agency, Dentsu already probably has a highly self-motivated staff. The program enables these employees to act with freedom and autonomy and is thus a perfect match for both the company’s existing workforce and workers it hopes to recruit in the future. It is also closely aligned with Dentsu’s core business. As an advertising agency, the company is a communication specialist, and there is potential for the Labs to help broaden the company’s activities in all sorts of new directions.

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