A Bottom-Up Approach to CSR: Itochu Corporation
July 30, 2015
One of Itochu Corp.’s notable CSR initiatives is the Pre Organic Cotton Program, which helps cotton farmers in India transition to organic cultivation methods. Cotton grown under this program is used to add value to products that are marketed to consumers and to help stabilize the incomes of farmers further upstream in the supply chain.
Genetically modified seeds began being used in cotton cultivation in India in the 1960s in tandem with the increased prevalence of agrochemicals and chemical fertilizers. This has led to serious environmental degradation and a deterioration in farmers’ health and livelihoods. Cotton farms account for only 5% of the world’s total farmland, but growers in India account for 25% of the insecticides used globally. The cost of seeds and agrochemicals were a heavy financial burden for them, and the repeated use of chemicals was degrading the soil.
It All Began with a Pop Concert
Itochu first learned of the plight facing Indian cotton farmers through its involvement in a concert by a popular Japanese pop rock group. One of the musicians requested that organic cotton be used for the T-shirts and other merchandise sold at the concert. A member of Itochu’s staff in charge of procuring cotton fabric flew to India to meet that request.
There, he learned of the health and environmental damage caused by highly toxic agrochemicals, which ravage the skin when touched with bare hands or feet and cause respiratory and visceral disorders when inhaled. They also kill the microorganisms in the soil, making it barren and gradually leading to smaller crop yields. Agrochemicals in the soil also seep into the groundwater, causing incalculable health damage to people and livestock that drink water from the well. Agrochemicals are costly, and the more they are used, the poorer the soil quality and lower the yields become, forcing farmers to buy yet more chemicals. Trapped in this vicious circle, they become so poor that they can no longer borrow money from banks. They are forced to turn to usurious money lenders and are driven further into poverty and—in some cases—to suicide.
If they could stop using agrochemicals and make the switch to organic farming, they would be able to escape this vicious circle, resulting in both health and economic benefits. But they faced a major obstacle.
Figure 1: Pre-Organic Cotton Program
Three years were required before harvests could be certified as being organic. During that time, crop yields would decrease from insect damage and lack of nutrients in the soil. Farmers were unable to use GM seeds, moreover, and were forced to purchase non-modified seeds. Because they could not charge a higher price until certification, their income would drop by 20% to 30% for several years. Most farmers were reluctant to take such risks to transition to a type of farming in which they had no experience.
The Itochu employee had an idea. Could not a support program be instituted with the understanding of clothing makers and consumers who were aware of the benefits of organic cultivation to cover the three-year period until farmers can gain certification?
The cotton produced during the transition period would be labeled “pre-organic cotton,” and necessary support would be provided to farmers who chose to make the switch. They would be given the non-GM seeds that they needed to be certified as organic, receive instruction from experts, and gain advice from accreditation inspectors. To compensate for reduced yields, the harvests would be purchased at a higher price than the market rate. Such support during the transition period would enable farmers to gain accreditation and embark on full-scale organic farming.
The Program’s Impact
Since the launch of the program in 2008, 3,848 farming households have taken part, and 1,179 have successfully received organic certification. In 2013, over 1,500 tons of pre-organic cotton were sold to over 40 companies and were used in related products that rang up sales of 500 million. The 2014 harvest is thought to have reached 2,500 tons, with the expanding pre-organic-cotton market being driven by clothing makers and natural cosmetics manufacturers. The market will likely further expand to Europe and the United States, with targets of 5,000 tons and 2.3 billion in sales in 2015, and 10,000 tons and 5 billion in 2017.
The program began from a single musician’s comment and evolved as Itochu staff traveled to India, saw the situation firsthand, learned of the plight of local farmers, and decided that something should be done about it. The program thus exemplifies how an attempt to protect the environment and human rights led to the resolution of a grave social issue and embodies the two characteristics of Itochu’s CSR: its grass-roots, bottom-up focus and its links to core business operations.
The Great East Japan Earthquake
The grass-roots nature of Itochu’s CSR was also evident in its reconstruction support after the Great East Japan Earthquake. The projects the company implemented were not on a very large scale, considering Itochu’s size, and appeared quite isolated and without much focus. Yet there was a common thread running through all of them—the fact that they were all initiated by individual employees.
The staff from Itochu who volunteered in disaster-hit areas spent time getting to know the local people, after which they were able to talk freely about their deepest concerns. Itochu’s reconstruction assistance began from the things that employees had directly seen and heard. Their trading company background meant that they were experienced in launching new ventures from the ground up and knew how to move organizations to make things happen. Many of their conversations they had with local residents may have seemed inconsequential, but these discussions produced significant results, growing into various support projects and even new businesses opportunities.
Why Bottom Up?
Itochu’s CSR initiatives begin at the individual level. Sompo Japan makes use of outside experts to guide its initiatives, but Itochu seeks answers from its own employees.
This focus on employees is closely linked to the nature of the work trading companies do. Each business area has its own business model, with some seeking profit through investments and loans, some through imports and exports, some through logistics services, some through retail sales, and others through licensing fees for trademarks and intellectual property. Because so many different business models exist, understanding what trading companies do can be difficult. A person on the street would probably be unable to give a clear answer to a question on what a trading company should do to address social issues. This is why Itochu has its employees do the thinking.
Pre-Modern Roots of Itochu’s CSR
Itochu was founded in 1858, when Chubei Itoh began selling linen in Nagasaki. He took the sa n po yoshi philosophy of the Omi (now Shiga Prefecture) merchants of his birthplace and made it the foundation of his company. Sa n po yoshi (“three-way good”) teaches that the secret of success is to do business in a way that is good for the buyer, good for the seller, and good for society. Itoh’s favorite motto was: “Trading is compassionate business. It is noble when it accords with the spirit of Buddha by profiting those who sell and those who buy and supplying the needs of society.” At first glance, it can be difficult to see how “trading is a compassionate business.” But as “supplying the needs of society” suggests, Itoh believed that the raison d’être for a company was to respond to society’s requests.
Based on this founding philosophy, in 1992 Itochu chose “Committed to the Global Good” as its corporate philosophy. Itochu’s then approximately 10,000 employees around the world participated in discussions over the course of a year to select this philosophy.
When the company conducted an employee survey in 2013 to help decide its CSR policy, it was surprised to receive replies from 6,505 of the 6,738 individuals to whom the questionnaires were sent—an astonishing response rate of 96.5%. Itochu employees in Japan had a 99.5% response rate (4,818 out of 4,844), while overseas workers had a 89.1% rate (1,687 out of 1,894).
In identifying which social issues to address, the company consulted with outside experts. While these discussions were conducted by the president and senior managers, their contents were shared openly with all employees.
This process resulted in the identification of four material issues: (1) climate change, (2) sustainable use of resources, (3) respect and consideration for human rights, and (4) contributions to the local community. The questionnaires also asked how the company should address these issues. In 2010, 40.8% of respondents chose “promoting businesses that help solve social issues,” but in 2012 that figure rose to 54.8%—more than half. This finding suggests that more employees have come to understand the importance of integrating efforts to address social issues with the company’s main business operations. As a result, the number of projects like the pre-organic cotton program has increased.
A Special Issue on CSR
Even with such a corporate culture, creating a system to support bottom-up CSR activities is not easy. Itochu publishes a monthly, bilingual in-house newsletter for its employees worldwide, and the September issue each year carries a special feature on CSR.
The cover of the September 2013 issue shows a map of the world with illustrations of the various CSR projects Itochu is undertaking. The title of the feature is “Itochu’s CSR Vision,” and the articles in the magazine describe the various CSR initiatives being implemented at the grass-roots level. Anyone can see at a glance how the company’s employees are working to address various social issues around the globe.
Figure 2: Itochu’s CSR Vision
The September 2013 issue of the newsletter starts with a message from Itochu President Masahiro Okafuji, which begins, “Itochu’s basic approach to CSR activities is to contribute to achieving a sustainable society through our business activities. I strongly urge all of you to take this opportunity to think about the relationship between our business operations and society.”
The message continues: “When I was just starting out, in the early years, I once proposed a solution to the problem of a wholesaler customer who strongly needed to get rid of some inventory. Itochu didn’t bear any responsibility to that customer in terms of business once Itochu had sold them the goods, which had then become inventory, but still I couldn’t abandon a customer in need. So I made a tremendous effort to think through the problem. My subsequent proposal was successful and the customer was very happy that Itochu had continued to make such efforts even after the business transaction. As a result, the customer was able to build a relationship of trust with us. This is just one episode from my business activities, but I think it well illustrates how this approach to solving a customer’s problems also holds true for how we should think about CSR activities.
“At first glance, CSR sounds a little difficult, but I think it becomes a bit easier to understand if we see that in the same way we work to solve any problems that our customers might have when we are doing business, we must also work to solve any problems that we find right in front of us.
“We must clearly grasp Itochu’s impact on human rights and the environment as we pursue our business activities, and ascertain whether we are indirectly contributing to infringements of human rights or cases of environmental pollution occurring in our supply chain. And, we must take steps to check any such occurrences with international standards. It is by no means an easy matter to create a sustainable business based on a framework of values shared by the Company and society. We can take no short cuts; rather, we must adopt a respectful attitude to society, listening to what it is telling us, and using every ounce of our wisdom.”
This message conveys two things in an easy to understand way: that the relationship between a company and society is its very raison d’être and indispensable to its growth; and that if a company cannot deal effectively with social issues, its value as a company will suffer.
Sharing Schemes and Ideas
Also in the issue is a roundtable discussion among the leaders of various projects in which social issues are addressed as part of Itochu’s core business. The participants include those in charge of the pre-organic cotton program from the Textile Company, the lithium ion battery project from the Energy and Chemicals Company, and the Indonesia geothermal power generation project from the Machinery Company. The first topic they discuss is the difficulty of balancing social contributions and profitability. They indicate that the process of seeking out social issues at the grass-roots level, then using the company’s strengths to turn them into new businesses, can lead to achieving that balance. They also address the question of what is social contribution.
“We may think we’re doing something good for society, but we always have to be on our guard against becoming smug or complacent,” one of the participants said. “There may also be times when we feel we’re contradicting ourselves. In that sense, the opinions and assessments of outside experts can help set us in the direction where we really want to go.”
The purpose of the roundtable is not just to introduce the content of the company’s CSR projects but also to share the thinking that went into their organization.
In an article titled “Exploring Business and Human Rights,” the relationship between social issues and business is explained in an easy-to-understand way from the perspective not just of launching new ventures but also of managing and averting risks. It covers basic questions about human rights and why they must be considered, as well as issues more specific to a multinational trading company. It introduces recent developments around the world, including codes of conduct, and concrete examples of issues that might actually occur on the job, thus encouraging employees to think about how they would handle a human rights situation.
The article is linked to an online confirmation test (and the questionnaire survey mentioned above), thus spurring employees to take action, not just to read. The test is issued in Japanese, English, and Chinese and was completed by 96.5% of employees.
CSR Action Plans of Each Division Company
Although Itochu’s CSR promotion system requires various departments to run a plan-do-check-act (PDCA) cycle, it does not go so far as to expect quantification. In that sense, the system is characterized by a level of autonomy (Figure 3).
Itochu asks all its division companies (Textile, Machinery, Metals and Minerals, Energy and Chemicals, Food, and ICT, General Products & Realty) in Japan and abroad to produce a CSR action plan. The various departments within each company identify their CSR and social issues, after which an annual plan is drafted. The plan is used to analyze each year’s achievement and to make a self-assessment, and a new plan for the following year is then drawn up based on these conclusions.
Figure 3: Itochu’s CSR Promotion System
The plans drawn up by the division companies are published on Itochu’s website and in its CSR report with statements by each president regarding their medium- to long-term growth strategies. They are, in effect, pledges that must be met with action. Despite the diversity of operations typical of a major trading company, Itochu here, too, emphasizes a bottom-up approach.
Social Issues that Directly Affect Business Operations
By their very nature, trading companies work across national borders, and they face the risk of local issues directly affecting their business operations (Figure 4).
For example, they need to be mindful of child labor and other failures to respect human rights in developing countries that form part of the supply chain, such as during the procurement of raw material or the production process. Even if the trading company itself takes steps to ensure compliance with human rights standards, it will still be taken to task if its business partners are found to have violated those standards.
Many companies dealing with resources often confront the issue of conflict minerals, which are extracted in conflict zones and sold to perpetuate civil wars or conflicts resulting in grave violations of human rights, as well as to sustain the activities of armed groups and antigovernment organizations. In 2010 the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the United States requiring US-listed companies using such minerals (tantalum, tin, gold, tungsten ores, etc.) from or near the Democratic Republic of Congo (formerly Zaire) to provide the US Securities and Exchange Commission with information on how the minerals were acquired. This is to ensure that the purchase and use of the relevant minerals do not become a source of income for armed groups and exacerbate human rights violations in conflict zones.
Figure 4: Trading Company’s Business Areas and Risks
Tantalum is used in products such as cellphones, camera lenses, inkjet printers, personal computers, televisions, and jet engines. Tin is used as food containers, in aerosol cans, solder, tin plating, kitchen goods, and integrated circuits. Tungsten is used in light bulbs, X-ray tubes, integrated circuits, and heat sinks. All of these end products are a familiar part of our everyday lives.
The scale of human rights violations in the Democratic Republic of the Congo is severe. Despite being rich in natural resources, the country is afflicted by conflict, poverty, human rights violations, and the spread of infectious diseases. The problem of sexual violence towards women is especially appalling. The Dodd–Frank Act regulates companies that have direct or indirect dealings in conflict minerals, its purpose being to stop the growth of armed groups with a record of grave human rights violations. So, while legally it does not apply to Japanese companies that are not listed on the US stock exchange, it barely needs saying that—considering the law’s aims—Japanese companies are expected to abide by the spirit of the law.
The issue of how to implement a global response not just to conflict minerals but also to human rights abuses, environmental degradation, and other problems is extremely important. One human rights issue is the protection of indigenous people living in areas rich in natural resources. There are examples throughout history—essentially during the colonial era—of peoples who were dispossessed of their lands because they happened to have mineral deposits. In 2007 the UN General Assembly adopted the UN Declaration on the Rights of Indigenous Peoples. While it is not legally binding, there is a social consensus on the need to protect the rights of indigenous peoples and preserve their culture. Companies are being called upon to respond responsibly to these initiatives.
Identifying Specific Human Rights Issues
One example of a potential human rights issue that might crop up on the job, cited in the newsletter’s “Exploring Business and Human Rights” article, is as follows:
Company ABC launched a new resource development project with a partner firm and had obtained the approval of the local government. When the project actually began, though, a large number of local residents, including indigenous people who have long been living on the land, launched a protest. ABC requested the services of its security contractor to keep the protesters under control, and it set up a meeting with local leaders, who lodged the complaint that the project was begun without their knowledge or consent.
Readers are then asked to identify specific human rights issues at stake in this example. The answers, as they apply to Itochu’s value chain, were as follows:
The first right that was infringed upon was the right to free, prior, and informed consent of local residents. Special consideration must also be made for indigenous people with unique histories and cultures. When launching a large-scale development project, ABC should have conducted dialogue with local residents in advance and obtained their consent. Furthermore, when the services of a security company are used, there is a need to draw up policies to ensure that the use of arms by security personnel do not lead to an infringement of the rights of protesters.
There may be many other issues to consider. But the important thing is to deal with each one individually, as they all require a separate response. There is no panacea for all human rights issues.
The last thing a company wants to do is to become a cause of poverty, famine, or environmental degradation in the regions where it does business. Not doing anything to address such problems could also threaten the sustainability and growth of its business. Trading companies that invest in the food or raw materials sector in developing countries may need to be patient before they reap any significant returns. This is why Itochu addresses social issues not just from a risk management perspective but also with the intention of helping improve local conditions.
The Food Company’s support for agriculture in Africa is one example. It partnered with a Japanese processed food manufacture with world-class R&D capacities to launch an agricultural development project for smallholder farmers in Mozambique. They are working in Japan and Mozambique to develop seeds that are suitable for growing ingredients that are easy to process into food and setting up a scheme so that those agricultural products can be sold at a higher price. The aim of the project is to raise the living standards of farmers in Mozambique and to provide a stable food procurement source for Japan.
Sharing CSR Action Guidelines with Suppliers
Itochu has established a set of CSR action guidelines to avert the various risks linked to social issues in Itochu’s supply chain. The guidelines are intended to promote respect for human rights, avoid child and forced labor, avoid workplace discrimination, prevent unfairly low wages, protect the environment and ecosystems, promote preemptive action to prevent environmental pollution, promote fair trade, and prevent corruption—as well as to disseminate information about these issues.
The company also implements a CSR survey for group companies and suppliers, both direct and indirect, working in high-risk countries, selected trade products, and high-volume businesses. The CSR action guidelines are shared with these companies and the concepts are explained, and the partner companies are encouraged to put them into practice. The survey is not conducted by Itochu’s CSR department but by the departments that deal directly with suppliers, members of which visit the suppliers to conduct interviews and distribute the questionnaires.
In addition to the 10 standard items covering human rights, labor, and the environment, there are extra check items tailored to each division company’s specific businesses so that the survey results better reflect actual conditions. For example, forest conservation items were added for the surveys conducted by the Forest Products & General Merchandise Division (lumber, pulp, and paper); food product safety items for the Food Company; and intellectual property protection items for the Textiles Company.
The survey is conducted annually, and in 2012 it covered 430 companies. By repeating this process, not only does Itochu communicate its CSR stance to suppliers but at the same time its own employees gain a better understanding of social issues from the perspective of risk management.
The CSR Dimension of M&As
During the prolonged period the yen’s appreciation, with the dollar dropping to 76.25 yen in March 2013, many Japanese companies stepped up their foreign investments. This included capital investment by overseas subsidiaries and acquisitions of foreign firms. Itochu was no exception, and, as part of this process, much attention was given to risk management relating to social issues.
M&As are undertaken for a variety of reasons: to acquire market share, expand business opportunities; establish new sales, manufacturing, or development bases; or secure human resources. It can enable a company to take the next step forward. It is also a means of shortening the time needed to achieve growth, namely, by grafting new operations onto an existing organization. But at the same time, acquiring a new company means taking on new risks that were previously unthinkable. Differences in corporate culture that are difficult to harmonize are one often-mentioned risk, but there are also others that are linked to various social issues.
Before an agreement is reached on a merger or acquisition, investors usually arrange for a valuation of the company to be bought, a process known as due diligence. Traditionally, this is undertaken by financial specialists, such as accountants, and legal specialists, such as lawyers, to assess whether the company’s assets have been fairly assessed, to ensure that the company’s accounts have not been falsified, and to confirm that the company is not embroiled in a legal dispute.
There have recently been efforts to undertake new types assessments to guard against risks not covered by the traditional process and which is encouraged by CSR departments. It is due diligence that covers areas such as the environment and human rights.
As explained above, more attention is now being paid to risks linked to social issues. A company targeted for an acquisition may possess excellent technologies, but it could also have hidden issues: for example, it may lack environmental protection policies in the production of raw materials, it may have ignored the rights of indigenous people, its factory effluent could be flowing into local rivers, and its parts suppliers may be turning a blind eye to the use of child labor.
If such a business is acquired before such issues are discovered, the purchasing company is unlikely to receive a proper return on its investment; it may also be held responsible for activities that occurred before the purchase. For such reasons, due diligence is now increasingly also conducted by specialists in human rights and environmental issues.
At Itochu, the CSR department works closely with the operation divisions that often do not have a full knowledge of social issues—appointing outside experts where necessary—so that the pursuit of profit does not come at the expense of corporate responsibility.
There are two dimensions to Itochu’s efforts to integrate social initiatives into the company’s main business. The first is the close attention the company pays to conditions on the ground—making firsthand observations to identify people’s real needs—both in its CSR initiatives and its business operations. Developing human resources well versed in this philosophy, it believes, will become a source of its corporate strength. At the same time, Itochu actively pools its expertise to implement locally focused programs of risk management as it continues to globalize its operations, well aware that social issues themselves have the potential to become risks for the company.