Socially responsible leadership

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responsibility. The focus is on leadership of business enterprises (in the developed world), and what the public expectations will be in terms of what I will call ...
Socially responsible leadership Tom Karp Tom Karp is a Senior Partner in the future and strategy consultancy firm PREVIEW a.s. and a Doctoral candidate at Rushmore University, Grand Cayman, British West Indies. E-mail: [email protected]

Keywords Leadership, Society, Social responsibility Abstract This article examines the role of business leadership in the coming decade with respect to social responsibility. It is argued, herein, that the successful leadership agenda in the coming decade will, to a greater degree than today, be shaped by the leader’s ability to take an active and constructive part in the society in which the business operates. The premises for putting forward this hypothesis are that the excesses of the 1990s are over, and the geopolitical, the economic, and the ecological environments offer challenges not seen for a long time in business. Socially responsible leadership in the coming decade will not only be about doing business, but also about questioning how this business is done and how value is created. In an increasingly complex environment, the integrity of the single business leader will matter, as will his or her ability to see the overall role of his or her company in the society in which it operates. Leaders are, to some degree, reflections of what their societies want from them. This paper points to a number of trends where public expectations today call for more social responsibility from commercial players. There are companies showing the way and taking the lead in meeting those expectations, and thereby setting new requirements for business leadership in the coming decade. Even though it is a debated issue, this article concludes that socially responsible leadership will be the answer in meeting those growing expectations. It is also concluded herein that most business leaders will be able to rise to the challenges in the coming decade, as they have before.

Introduction eadership is an issue that will always be much debated, studied and researched. The issue intrigues most of us as human beings, but the way we understand the role is changing. Where we once looked at military or political leaders for inspiration and insight, today, increasingly, it is business leaders who often provide our role models. Just what makes a good leader, however, is elusive. ``A leader is a dealer in hope’’, Napoleon once observed (Dearlove, 2003). There must be as many theories on

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leadership as there are leaders. But Jeffrey Garten, dean of Yale School of Management, wrote recently what I think is a most thought provoking article on leadership, entitled ``The future of leadership’’: Top business executives, like leaders in any profession, are reflections of what their societies want from them. They come from those societies, exist to serve them and cannot stray too far from public expectations in order to succeed in the long run (Financial Times, 2002a).

So what do our societies want from their business leaders? It is today a widespread view among business thinkers and leaders that the business environment and society at large are increasing in complexity ± because of changes and uncertainty levels. According to several business books published over the past few years, different forces are reshaping the business world, leading to an uncertainty in which the very nature of business, of work, of organisations and of economics is changing. The fast spread of knowledge, technologies and business practices during the last decade imply new requirements for the successful business leader. In industry after industry, it is no longer just a game of market power and financial muscle, economics of scale, and breadth of scope, although these factors are still important. The leadership emphasis is shifting from the efficient business management of mass markets and tangible assets, to effective utilization of knowledge, intangibles, human resources, and societal interaction. The leadership concepts and advice on ``how to . . .’’ flourish. The business leadership agenda has, in the past decade, been packed with more or less ``new’’ thinking and concepts. After the sweet 1990s and the hangover of the

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past two years, there is today a thinking by many that business will now get back to basics. An ongoing study of 40 Fortune 500 firms, conducted by the Center for Effective Organizations at the University of Southern California and the consulting firm Booz Allen Hamilton, concludes that we might be heading towards more pragmatic ``old-fashioned’’ management by numbers for the next couple of years (Kellaway, 2002). But is this what our societies want from our top business executives? As one response to what societies may want from our business leaders, there are trends pointing to the fact that businesses need to take on a more socially responsible role, at least as a pragmatic mechanism to regain some level of confidence and reputation after recent scandals. But is such social responsibility just another fad created to cover up for recent mishaps or a sustained change in the way of conducting business? This article aims to address the above by coupling business leadership to the growing movement of social responsibility. The focus is on leadership of business enterprises (in the developed world), and what the public expectations will be in terms of what I will call socially responsible leadership in the coming decade. For the purpose of the article, I will use the following definitions with respect to the issues in question: A socially responsible company is: (1) responsible to its stakeholders; (2) accountable for the broader effects of its business activities by aiming to deliver shareholder, societal, and environmental value altogether; (3) accountable and transparent in all aspects of its business operations. Socially responsible leadership is committed leadership of a commercial business enterprise with the objective of developing a socially responsible company, as defined above. Why socially responsible leadership? Milton Friedman once said that ``the business of business is business’’. According to The Economist (2002b), ``even allowing for some of the recent corporate scandals and the odd crooked CEO, most law-abiding companies do good simply as a by-product of their pursuit of commercial profits’’ ± as Adam Smith first proclaimed over 200 years ago. One example of this is the global retail store Wal-Mart. The chain employs thousands of staff worldwide, pays millions in taxes to society, and delivers goods cheaply to consumers. But is it conducting socially responsible operations and leadership? No, it is not. Wal-Mart has no visible agenda of being responsible to its stakeholders and transparent in all aspects of its business operations (Wal-Mart has also recently been accused of illegally forcing employees to work f o re s i g h t 5 ,2 2 0 0 3

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overtime without compensation, as well as firing employees because they favoured the formation of labour unions, and is therefore possibly not even complying with governing laws). But how responsible a company should be to other than just its own shareholders is a heated and mixed debate in the USA, Europe and Asia. The battle is said to be between shareholder capitalism, which basically states that commercial companies should pursue exclusively the interests of their shareholders, and stakeholder capitalism, which acknowledges that companies are also responsible to their workers, the local communities, and the environment. The debate has also to some degree become entangled with that of globalisation. One of the main charges that the anti-globalisation protesters put at multinationals is that they behave irresponsibly, as for instance argued by Klein (1999) in her challenging book No Logo): Corporations have grown so big that they have superseded government . . . they are accountable only to their shareholders . . . we lack mechanisms to make them answer to a broader public (Klein, 1999).

Making it even more complex, pulling politics into this, one can to some degree say that the left normally demands more rules to be applied to companies, to make them more responsible. The right argues that governments already burden companies with too many social issues, using them as vehicles to limit working hours (in France and Germany), to promote racial harmony (in the USA) and to clean up the environment (virtually everywhere). The Economist (2002c) brings a historical perspective into this discussion. According to the magazine, companies have willingly taken on social obligations without being pressured. Some examples of this are the traditions of the Quaker families who founded so many of Britain’s banks and confectionery firms; they had regular meetings where they needed to justify to their peers the good their businesses were doing. The notorious ``robber barons’’ built much of the USA’s educational and health infrastructure. Pullman constructed company towns, the argument being that wellhoused and well-educated workers would be more productive. Procter & Gamble pioneered disability and retirement pensions, the eight-hour day and guaranteed work for at least 48 weeks a year. Henry Ford paid his workers twice the market rate. Henry Heinz paid for education in citizenship for his employees. Tom Watson at IBM gave its workers subsidised education and country-club membership. And Silicon Valley’s pioneering company, Hewlett-Packard, has, at least up to recently, been arguing that profits are not the main point of its business. Here in Norway, companies such as, for instance, Orkla and Norsk Hydro, have contributed to building schools, infrastructure, sport stadiums, giving people education, and so forth.

Critics tend to dismiss all this as window-dressing or top leaders aiming to join the ``doing your bit for the society’’ club. But Richard Tedlow, a historian at Harvard, argues: . . . that the critics tend to confuse the habits of capital markets with those of the companies. Capital markets tend to be ruthless in pursuing short-term results, but most successful companies have normally tended to be more long-term focused (The Economist, 2002b).

These are arguments also taken by former Stanford University professors Jerry Porras and Jim Collins (1994). Between 1988 and 1994, they asked 700 chief executives of US companies ± large and small, private and public, industrial and service ± to name the firms they most admired. From the responses, they culled a list of 18 what they called ``Build to last’’ companies. One of their findings was that these successful companies put a lower priority on maximizing shareholder wealth or profits. Collins and Porras did not set out to find long-lived companies but, as it happened, they found that most of the firms had existed for 60 years or longer by (among other things) being sensitive to their environment. As Geus (1997) puts it in his book The Living Company: Corporations fail because the prevailing thinking and language of management are too narrowly based on the prevailing thinking and language of economics.

But the capital markets are a strong force. Institutional investors and pension funds are an increasingly bigger and anonymous owner in many companies worldwide today. Such investors naturally desire a reasonable return on their investment through profits, increases in share value, company growth, and future market potential. Quarterly performance pressures are today a ``normal’’ part of corporate life and are something most companies are adapting to. But, as shown by Porras and Collins (1994), the goals of short-term earnings and long-term societal responsibility need not be mutually exclusive. It is also often not possible to differentiate the habits of capital markets from those of the companies. But one can ask where the boundaries of a business are. And what are the forces pressing for greater social responsibility? Forces pressing for more socially responsible leadership There are several trends indicating an increased pressure on companies to adopt some degree of social responsibility measures. One obvious source of pressure is primary stakeholders as owners, consumers, employees, and suppliers. These are often interconnected, making it increasingly difficult to separate the different roles of the different stakeholders in a networked society, as well as the boundaries of business. Another source of pressures is secondary stakeholders including non-governmental organisations (NGOs), activists, communities, and

governments. A third source of pressure is general institutional expectations, reflected in different rankings, a steady emergence of principles and standards, and new initiatives to publicly report triple bottom lines for measuring the financial, social and environmental performance of a business company. The above are all what I will call external and internal stakeholder pressures. A different set of challenges is what I will call business initiated social responsibility. This is pressure arising from companies’ need to develop new markets and technologies in order to develop their line of business ± pushing ethical principles, labour standards, legal issues and accepted societal norms. A final challenge comes from pressures on the economic system as a whole. The need to restore confidence and come up with business solutions and financial mechanisms acceptable to the society will require other approaches from business leaders than what we have seen recently. Some of these signals are briefly discussed below. Stakeholder pressure Shareholders are today making their voices heard in many ways. Fund managers have, for instance, begun to question companies on social issues, and socially responsible investing, though still a relatively small-scale phenomenon, is growing rapidly, according to McKinsey (Cogman and Oppenheim, 2002). In the USA the assets of what are called ethical funds now make up approximately 13 percent of investments under management, which is up from 9 percent in 1997. The long-held assumption regarding the trade-off between returns and responsible investments is today being questioned by several academics. One example is the DSI index which has outperformed the S&P 500 on a total-return basis since 1990 (Waddock et al., 2002). This is also confirmed by analyses performed by Innovest ± a leading investment research and advisory firm specializing in analysing performance on environmental, social, and governance issues (www.innovestgroup.com). A growing number of studies suggest that at minimum a neutral and possibly a positive relationship between social responsible practices and financial performance can be found (Guerard and Stone, 1997; Sauer, 1997; Griffin and Mahon, 1997). This is, however, a debated issue. It is relevant to ask whether the social responsibility practice did enhance final performance or if the companies performed well financially before implementing social responsibility practices. I will argue that the explanation is that both are, to some degree, effects of the same cause, namely, that a well-managed company does well in most aspects. This is a view supported by the work of Waddock and Graves (1997), who have concluded that there is little practical difference f o re s ig h t 5 , 2 2 0 0 3

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between managing for social responsibility and managing well: A broader perception of managers’ responsibilities may be necessary if they are to enhance shareholder wealth (Waddock and Groves, 1997).

Shareholder activism is another growing force exerting pressure. In the USA, activist groups as diverse as the Investor Responsible Research Center and the Interfaith Center on Corporate Responsibility provide investors with more and more information about corporate practices. Similar examples can be found in Europe. In a recent poll of about 25,000 people in 23 countries, 60 percent of the respondents said they judged a company on its social record, 40 percent took a negative view of companies they felt were not socially responsible, and 90 percent wanted companies to focus on more than just profitability (Environics, 1999). Industries such as petroleum have come under pressure from consumers. Shell, for instance, lost a considerable market share in Germany in 1995 after activists persuaded consumers that its proposed disposal of the Brent Spar platform, in the North Sea, would harm the environment. Consumer pressure on corporate performance is kept alive through various consumer-oriented ratings, such as, for example, the J.D. Power ratings of products. Studies by marketing firms Cone/Roper and Walker Research both indicate that consumers are more likely to purchase products from companies they perceive as acting responsibly (Cone and Phares, 2002). This is also confirmed by work by the UK based Future Foundation, a think-tank specialising in monitoring and forecasting consumer trends: The public exposures for most companies are therefore greater than ever and better availability of information makes consumers increasingly aware of company practices (Willmott, 2001).

In an increasingly knowledge intense economy, opinions on where to work are increasingly important for many so-called knowledge workers. ``No-one’’ wants to be embarrassed about admitting where they work. Perceptions about how a corporation manages its wider responsibilities are often part of employee decisions about where to work, according to Greening and Turban (2000). If an organisation suffers a scandal, it can take years for its recruitment to recover. This is not only the case for ``high-fly’’ white-collar workers. Several watchdog groups are also looking out for the rights of employees in general (for instance the Sweatshop Watch) in order to put increased pressure on companies to reform their practices to meet global labour standards. In addition to the above pressures from primary stakeholders, companies increasingly also need to meet the expectations of such secondary stakeholders as NGOs, activists, communities and governments. NGOs and activists, aided by the increasing societal transparency and f o re s i g h t 5 ,2 2 0 0 3

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electronic communication, are well known sources of pressure. The capacity of activists and interest groups to mobilise, to disseminate negative information about companies, and to take action, have never been greater and we have seen this force in action a lot in the past few years. They expect more responsibility, more information, more leadership, and often require a lot of attention from a chief executive and his/her team. Communities and even nations are becoming increasingly aware of possible negative consequences of eroding tax bases and lack of local commitment. According to Burke (1999): Companies may find it necessary to act as neighbours of choice living up to standards of excellence with respect to their communities.

Standards of community involvement will also enable companies to benchmark their own practices against those of others. In short, it seems that companies in some cases will need to earn the right to operate profitably ± by persuading everybody involved that the company has the moral right to undertake the business activity in question ± and to establish a business norm acceptable to all stakeholders. The increasing transparency in society is another important factor pushing for greater social responsibility. New forms of accountability and visibility are emerging in the form of a number of ``best of rankings’’, a growing array of principles and global standards, reporting and accountability initiatives. Examples of these are rankings from Fortune 500, Industry Week’s ``100 Most Admired’’, the Financial Times’ ``Europe’s most admired companies’’, the UN’s Global Compact, the International Labour Office ``Business and social initiative’’, the Global Reporting Initiative, and the yearly rankings from the consultancy SustainAbility. Business development pressure Several business thinkers and leaders have pointed out that a number of multinational companies are now closing in on the ``traditional’’ model for generating growth and profits: inventing new products, rolling them out worldwide, and then making profits due to the effects of economy of scale. They seem to have consumed the first low hanging fruit of globalisation ± they have gone from selling 15-20 percent of their products abroad a decade ago to selling something like 50 percent today (Wooldridge, 2002).

Some markets are therefore not far from being saturated. At the same time, companies are finding it harder to come up with new products or markets. Developing countries, on the other hand, offer attractive opportunities both as markets and as sources of raw materials and engineering/production capacity. But to meet the environmental, labour and marketing standards required to enter such markets, an active dialogue between

businesses and local governments, authorities, unions and interest groups is often needed in order to develop such opportunities. Finding a balance between the dual demands for business development and the maintenance of ethical principles will pose new challenges to business leaders who want to take social responsibility seriously. Another important market opportunity for many commercial companies is the privatisation of traditional public services. Governments worldwide are increasingly using private-sector companies to provide traditional public sector services such as transport, infrastructure and utilities, education, health care and pensions. The effect of privatisation is much debated. But the trend is clear and the balance between pure profit making and benefiting society is delicate. But the public sector offers much needed growth opportunities for many commercial companies. Companies operating in this field therefore face a constant battle to prove that a for-profit company can and will act in the best interests of all stakeholders and not only its own shareholders. Another example of much needed social responsibility is the fact that the exploitation of new technologies ± for instance biotechnology and information technology ± are frequently accompanied by debates about ethics. The moral legitimacy of the genetic research on which biotechnology depends, for instance, raises new and other complex responsibilities for companies towards the societies in which they operate. Pressures on the economic system Finally, I will also argue that the economic system on which our societies rest is under pressure. As Garten (2002a) puts it: We are on the cusp of a very serious societal backlash, not just against CEOs but also against the very structure of our economic and business system. Recent financial scandals and crises have pointed to some of the defects of the entire global economic system. The threat is not so much that capitalism will be replaced by something else but that the momentum behind economic dynamism ± triggered by deregulation and liberalization over the past couple of decades ± will be halted.

An active and responsible participation from business leaders in solving financial market challenges by discussing regulations, accounting practices, minimum standards, ethics and social safety nets, will be required in order to restore confidence between society and business. The discussions need to include issues such as measures to avoid ``boom and bust’’ business cycles by the use of active financial politics, in order to avoid recessions, unemployment, overcapacity, excessive start-ups, etc., and possible ways to exercise greater social responsibility. The rationale for socially responsible leadership ’’So, what’s new?’’ one might ask. Pressures from various groups have, to some degree, always been there, and so have business development challenges. As argued above,

companies have tended to act reasonably responsibly in the past, although with some exceptions. Why should they need to act in a more socially responsible way now? Is today’s quest for greater social responsibility just another way of restoring confidence after the last couple of years’ corporate scandals? According to The Economist (2002b): Companies are most effective as social players when they are doing things that are close to their shareholders’ interests.

Why should they go the ``extra mile’’ and possibly take on costs by being socially responsible, when they are not certain that actions in this direction will give financial payback? The answers to these difficult questions are complex. The debate on social responsibility in business is, as previously argued, a mixed battle of ideology; shareholder versus stakeholder capitalism, and politics in terms of left or right wing measures in order to regulate/not regulate business and markets. Leaving ideology out of this, I will, however, argue that the business of business is to some degree today not only business in the ``traditional’’ context. Commercial organisations will increasingly, in the coming decade, need to earn the right to operate profitably due to increased pressure from various groups ± owners, customers, employees, NGOs, etc. A business company will in some cases need to prove that it has the moral right to undertake the activity in question, and establish a value creation system and profit norm acceptable not only to its shareholders but to most stakeholders. The following arguments support this conclusion: & A growing number of studies suggest that, at minimum, a neutral and possibly a positive relationship between social responsible practices and financial performance can be found. This is a debated finding, but no negative results have been found, i.e. that social responsibility does not pay back in any form. & A steadily increasing number of fund managers and investment firms have started to question and pressure companies on ethical, social and environmental issues, in addition to financial performance. & Several business writers and academics have pointed to the fact that socially responsible companies have an edge in attracting good employees, customers and suppliers, thereby increasing their own competitiveness and value. & Socially responsible behaviour builds trust and the company brand. Being cynical about this, one might also argue that such trust gives companies the benefit of the doubt when dealing with customers, workers and regulators. & The increasing transparency in a networked and interconnected society in the form of a number of ``best f o re s ig h t 5 , 2 2 0 0 3

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of rankings’’, a growing array of principles and global standards, reporting and accountability initiatives, all point towards an expansion of corporate responsibility and accountability in all aspects of business operations. & The possibility that governments will not tolerate corporate freedom of action because of an increased dissatisfaction with their social and environmental effects, and will therefore limit or eliminate that freedom ± thereby creating a strong need to co-opt by removing its potential cause. As some companies seem to have behaved in a socially responsible way for many years, as argued by The Economist, what are the added requirements today or in the near future, if any? I will argue that most of the social measures implemented by many companies throughout the twentieth century have basically been ``social’’ actions taken to improve their own productivity and competitiveness ± the social responsibility in demand today and in the near future is about going one step further due to the reasons presented above. This may seem drastic, but it is my argument that it is now time to tackle the paradox that, while capitalism has created more wealth than any previous economic system, it has possibly done so at a cost. According to Starovic (2002): The rating agency Trucost recently claimed that no UK company would be profitable if the cost of its impact on the environment was reflected in its bottom line. It is debatable whether any of the most respected companies of the past 100 years have ever made an environmentally sustainable profit (Starovic, 2002).

The above factors will definitely set new requirements for business leadership in the coming decade. If so, what would be the appropriate leadership response and agenda? Societal challenges and leadership It is unrealistic to expect commercial companies to drop profit-making operations to save the planet. But responsible business development has crept up the corporate agenda in the past few years due to some of the pressures as discussed above. The year 2002 will be remembered in business circles as a year when responsibility in some form came back to the business arena. But is it here to stay? There seems to be a growing recognition in the business community of the need to understand and respond to some of these expectations ± at least in a manner that helps to build a company’s own competitive edge. At the very least, businesses, if they are to remain viable, will need to manage risks and sustain profitability while tackling tough economic conditions in the years to come. The first line of defence for many firms and leaders is to produce a corporate social responsibility report. This is a positive development towards greater social responsibility but, if such reporting fails to translate into a mechanism for f o re s i g h t 5 ,2 2 0 0 3

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improving performance, it cannot reduce a company’s environmental impact or promote social equity. Social responsibility will involve structural changes, either to a company’s value chain or to the entire business model. Either way, many companies need to rethink their business leadership role in society. One example of this is the Co-operative Bank, recently ranked top by SustainAbility as the world’s most sustainable company (Financial Times, 2002). Last year it refused £2.5 million of business on ethical grounds. Around 98 percent of the bank’s electricity comes from renewable sources, its water consumption has been cut by 9 percent since last year and it saves £3.5 million a year primarily from reduced paper usage. It also reports that its ethical stance has contributed £20 million to its pre-tax profits of £107.5 million. A growing number of companies are embracing some degree of social responsibility. A survey by the EU Commission (CSR Europe, 2002) concludes that 95 per cent of Norwegian medium-sized enterprises are involved in some kinds of socially responsible activities. More importantly, an increasing number of multinational and leading companies are today implementing policies and procedures that align private gain with public purpose. Companies as diverse as Adidas, Suez, Novo Nordisk, BAA, BT, Rio Tinto, South African Breweries, Shell, Unilever, BASF, and BP, to mention some, are starting to move from passive compliance and philanthropy, to gradually change the way they carry out their business activities in interaction with the public domain. The performance of Adidas’ managers is today measured against human rights policies and influences their annual bonuses (Crawford, 2000). Another example is a survey by Deloitte and Touche that last year found that roughly half of South Africa’s leading firms have adopted a formal HIV/AIDS policy (The Economist, 2002a). BAA addresses aircraft noise. South African Breweries sets out terms on corporate citizenship on which it enters joint ventures and agreements with franchisers. Chiquita uses rigorous environmental standards on its farms in Latin America. The BT Group makes ethical purchasing a condition of its supply chain management. Novo Nordisk is pursuing ways to resolve nondiscrimination issues for its employees and improvement of access to diabetes care in undeveloped countries. Rio Tinto is reducing the environmental impact of its mining activities, as well as creating sustained livelihood partnership models for deprived communities. Suez is working in private/public partnerships in order to reduce the environmental impact of its operations and to provide solutions to rural communities where the water is scarce. Unilever is raising standards of education in local communities, as well as promoting health initiatives and environmental impact reduction programmes. Shell is working with renewable energies and promotes good

neighbour initiatives, and has moved from indicator-reporting towards a stakeholder consultation model, linking input from stakeholders to the company’s own risk management system (examples are taken from company home pages and from SustainAbility’s latest benchmarking report: www.sustainability.com/ trust-us, when not specifically referenced). The ``how tos’’ in terms of social responsible leadership naturally flourish ± ranging from the more ``religious’’ approaches to the more pragmatic ones. On one end of the scale are Waddock et al. (2002), who recommend what they call total responsibility management. This involves companies adopting a set of value based operating principles, a mission statement on responsibility, and a code of conduct. On the other end of the scale are the more pragmatic McKinsey consultants Cogman and Oppenheim (2002), who think that companies should take a long-term view of market design, should learn to work with ± not around ± stakeholders, and understand their societal assets in order to use these strategically. In my view, the obvious leadership challenge will be to deliver shareholder value, wider societal value and increased accountability to stakeholders. Demonstrating that these goals are not mutually exclusive and can possibly be mutually beneficial lies at the heart of the growing corporate responsibility movement; I will define them as the essence of socially responsible leadership. What are the specific leadership challenges to achieve the above goals? There are a number of important issues but, based on my review of various research work by Waddock et al. (2002), Timms (2002), Greening and Turban (2000), Cone and Phares (2002), as well as CSR Europe’s latest report (2002), I will argue that the following will influence the business leadership agenda in the coming decade: (1) The ability to engage in more systematic communication, consultation and collaboration with key stakeholders ± learning to work with and not around key stakeholders. (2) The ability to make a larger public commitment to purpose, principles and goals. These do not need to be wholly ``good’’ or politically correct, but definitely trustworthy. Companies will need to set measurable and achievable targets they believe in and publicly report on them in a consistent and transparent manner. (3) The capacity to incrementally integrate social responsibility into core business processes, structures and strategies ± that is, to embed responsibility principles into the basic criteria for business decision making. (4) The ability to look on societal responsibility, not only from a passive compliance and risk management point of view, but also with a value creation and innovation

mindset. Ethical, social and environmental criteria should be integrated into R&D, as well as into the search for new products, services and markets that meet social and environmental, as well as commercial, needs. These are recommendations supported by studies from the above academics. But conflicting views also exist, for instance as argued by The Economist (2002c): Companies will do more good than people give them credit for. But they are not here to build a fairer society. That is the job of government.

Here I disagree with The Economist. In my view, governments will not manage this task without the help of the business world; the challenges are too great and interconnected. But behind the ``glossy headlines’’ there are major challenges facing leaders who want to incorporate social responsibility into their businesses. CSR Europe (2002) reports that around 3,500 major companies are, to some degree, addressing corporate responsibility issues today. Comparing this to UNCTAD’s estimates stating that there is a total of approximately 60,000 trans-national business corporations, which have around 800,000 foreign affiliates in the business world today, there is a long way to go. The leadership challenges in order to deal with an increased demand for social responsibility are big. Several leading companies, however, seem willingly to take such a role, and most of them tend to agree that a combination of regulation, market mechanisms and voluntary initiatives are needed. Post-Enron, -WorldCom, -Global Crossing, -Tyco, and -Arthur Andersen, I will also argue that the leadership challenges with respect to social responsibility involve financial issues to some degree, in addition to ``classical’’ ethical, environmental and social issues. This is a view supported by Garten (2002b) and others. The US business environment and culture have been given the deepest wounds in the past couple of years. But Europe has also had its share of scandals, albeit of lesser magnitude than the ones in the USA. There have been a lot of articles, books and discussions about this. I do not intend to recap or analyse all of this, as the post-mortem of recent scandals is still ongoing and objective research material is still scarce. There will certainly need to be more discussions, hearings and work by commissions before clear conclusions might be drawn. But, as far as I am able to judge, the business leaders themselves have been pretty much absent from this debate. What does this situation require of business leadership and responsibility towards the societies they are supposed to serve? Should leaders deal with the damage done to the reputation of business culture and to public confidence in the integrity of the financial markets? Yes, they should. f o re s ig h t 5 , 2 2 0 0 3

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Among a number of challenges, I think the business leaders’ ability to fight off the short-term earnings pressure is important with respect to social responsibility. The resolution of this situation will be highly complex, and may include anything from regulatory measures to stock market practices. In terms of contribution from top leaders, I think a good starting point is to give correct financial information and, more importantly, switch the focus to long-term value creation instead of the quarterly earnings prediction. It is time to take on Porras and Collins’ (1994) advice and create ``build to last’’ companies with a long-term focus. This is also a time when shareholders are tired of heavy losses. They now expect not just more attention ± but a greater share in the profits. An increasing number of companies thus find themselves caught between two goals: satisfying shareholder expectations of earnings growth and society’s demand for social responsibility. But in order to satisfy the demand for earnings growth, most companies will need to tap into new opportunities, pushing the established borderlines of ethics, technology, ecology, and so forth, and they thereby have no choice but to implement social responsibility measures. These companies will, to a larger degree than before, need society’s permission to explore such opportunities. I think Garten (2002a) sums this discussion up by saying: Chief executives will be caught in the crossfire of powerfully conflicting public pressures. It will take leaders skilled in more than just the generation of profits to cope (Garten, 2002a).

Conclusion In this article, I have argued that the business leadership agenda in the coming decade will, to a greater degree than today, be shaped by the ability to take an active and constructive part in the society in which businesses operate. My main premises for putting forward this hypothesis are that the geopolitical, the economic and the ecological environments offer challenges not seen in business for a long time. These challenges are of different magnitudes and origins, but will collectively lead to a stronger connection between business and society Business leadership in the future will therefore not only be about doing business, but also to a larger degree than previously, questioning how this business is done. It needs, in some cases, to involve a close examination of how value is created. Studies also show that there is little practical difference between managing for social responsibility and managing well. Hence, in an increasingly complex environment, the integrity of the single business leader will matter. The ethics of the individual business leader will be a competitive advantage to many companies, as will the leader’s ability to see the overall role of his or her company in the society in which it operates. f o re s i g h t 5 ,2 2 0 0 3

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There are strong trends pointing towards such a change in the years to come, especially from the business community itself. This is exemplified by a lot of multinational and national companies leading the way to more social responsibility, the growing interest in the financial markets for responsible investments, and an increasing customer interest in purchasing products or services from companies they perceive as acting responsibly. But how responsible a company should be to other than just its own shareholders is an ongoing heated debate, and conflicting views and schools of thought exist. My conclusions in this article are therefore also a product of my personal beliefs, values and hope. Also, it is easy to say that business leaders should do the right and responsible thing. In a complex and fast-changing environment, it is sometimes not easy to see, through the ``fog’’, what the right thing to do in a given situation really is. But this is not an excuse. The more complex environments get, the more the integrity and responsibility of the single business leader will matter. There is no point in waiting passively for a government intervention with respect to regulative measures on social responsibility; it is a matter of taking leadership. Will business leaders be able to rise to this challenge? Yes I think so, because they have done so before. References

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