by George Lodge and Craig Wilson, Princeton University Press, 2006
Although world leaders have made the reduction of global poverty a top priority, it still persists. This book argues that the solution lies in the creation of a new institution, the World Development Corporation (WDC), a partnership of multinational corporations (MNCs), international development agencies, and non-governmental organisations (NGOs). MNCs have much to gain from helping to reduce world poverty; they and their shareholders will benefit from improved legitimacy, stronger markets and profitability.
(Reviewed by Kevin Barham in July 2007)
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Although world leaders have made the reduction of global poverty a top priority, it still persists. This book argues that the solution lies in the creation of a new institution, the World Development Corporation (WDC), a partnership of multinational corporations (MNCs), international development agencies, and non-governmental organisations (NGOs).
George Lodge is Emeritus Professor at Harvard Business School and a former Secretary of Labour for International Affairs in the Eisenhower and Kennedy administrations. Craig Wilson has been a consultant economist for the World Bank and works for the International Finance Corporation in Bangladesh. (He is co-author of Make poverty business) They believe that MNCs have the critical capabilities required to build investment, grow economies and create jobs in poor countries; and that MNCs can do so profitably and thus sustainably. But, because MNCs lack legitimacy and risk can be high, a collective approach is better than an individual company going it alone. That is why they urge the creation of a United Nations-sponsored WDC, owned by a dozen or so MNCs with NGO support.
The authors describe how the decline of corporate legitimacy stems from a number of factors, including revelations of large-scale abuse in corporate governance, and changing public expectations about the impact of global companies on society. Maximising shareholder value by competing to satisfy consumer desire in the marketplace is not enough any more. Corporations are being pressed by governments and NGOs to serve a variety of community needs and contribute to solving such problems as environmental damage, epidemic diseases, child labour, and developing country poverty.
This is happening at a time when the traditional ideas from which corporations derived their legitimacy have eroded. The notion of untrammelled property rights, has given way to a realisation of broader community needs that the corporation must serve. Much is now expected of firms beyond making profits. However, MNCs are faced with a "Catch-22 situation" – firms that lack legitimacy can’t respond effectively because their response requires them to cooperate with people (the community) and those people don’t trust their intentions.
Some of the world’s largest firms have been giving much more attention to questions of corporate social responsibility. Despite this and the continuing legitimacy problem, the international consensus on the need for global poverty reduction is growing stronger. MNCs are being called on to do more, especially as the antipoverty efforts of national and international development organisations continue to be disappointing. However, there is no agreement on how they should do it.
MNCs, say the authors, are at the heart of the process of globalisation – and that makes them an easy target for critics. Globalisation has enriched many and left many others behind; it has sometimes had adverse effects on the environment, and it has failed to reduce poverty and wealth inequality. Nonetheless, globalisation will continue and MNCs will continue to be easy targets for those who focus on its negative aspects. Some of the more thoughtful and far-sighted corporate leaders are responding to the threat posed by the decline in their legitimacy by searching for ways to meet expanded community expectations, provide environmental leadership, reduce global poverty and make the world a better place, while still satisfying their shareholders.
As far as poverty reduction is concerned, the collective response of MNCs has been sporadic, poorly organised, and inadequate. Their efforts have been insufficiently supported by international institutions and national governments. The question, say the authors, is how to coordinate the actions of the many interested parties and achieve the desired objective.
The vulnerability of MNCs to attack is a function of their efficiency. What differentiates modern MNCs from earlier large firms is their great mobility in seeking low-cost inputs to production. They are able to shop the world looking for the lowest cost suppliers and can move with considerable speed to take advantage of lower costs and friendly regulation. The sheer size and reach of MNCs makes them appear to their critics as beyond the effective control of political authority. (ExxonMobil, the world’s largest corporation, is larger than 180 of the world’s 220 national economies.)
Their economic power, say their critics, has given MNCs political power but they are like "rogue elephants in the forest". They pollute, exploit low-cost labour, bribe officials, cooperate with unsavoury governments, and subvert traditional countries. The states in which they operate, especially poor countries, will not or cannot control their behaviour.
Despite their growth and success, they have failed to bring prosperity to much of the world and the gap between rich and poor has worsened. Corporate foreign investment in the developing world has been concentrated in just a few countries, especially China. Most Africans were better off 40 years ago. Despite the $1 trillion that has been spent on grants and loans to fight poverty since 1945, nearly half the world’s population still lives on less than $2 a day.
Part of the "new reality" for MNCs is that they are both targets for opponents of globalisation and are also part of the solution to the huge challenges faced by the world. The new reality includes the "swarms of self-appointed vigilantes" that have arisen to curb what they regard as corporate abuse. These organisations are a subspecies of NGO (and include such organisations as Amnesty International, Friends of the Earth, and Oxfam International). They have enlisted the support of many governments and gained a lot of influence in international organisations such as the UN, the World Bank and the International Monetary Fund (IMF). At their best, they reflect a global consciousness rooted in moral convictions about rights and duties shared by human beings everywhere. Their emphasis on global rights and duties gives them plenty of ammunition with which to attack MNCs.
The authors argue that business ultimately derives its legitimacy from "ideology", a collection of ideas that a community uses to make values explicit and give them vitality in institutions. Ideology links values on the one hand and the real world on the other. Any authority experiences a "legitimacy gap" when its stated aims and purposes are at odds with those of the larger community.
Ideologies are dynamic and are changed by crises in the real world – economic depression, disasters, etc. In response to crises, institutions such as governments and business change their ways of coping. The problem is that the creation of a new ideology to justify what is happening is delayed and the old ideology remains in place; so the institutional change is rendered temporarily illegitimate.
The traditional assumption from which managers derived their authority was the "right to manage". World opinion now expects MNCs to do more to reduce global poverty. This is becoming a measure of corporate legitimacy. Those companies that find a way to reduce poverty more effectively will have more legitimacy than those who remain tied to the old ideology. Their managers will find it helpful to think about their poverty-reducing activities using a different ideological framework, because in departing from the old ideas they need new ones to ensure that their actions are seen as just.
The current shift in ideologies reflects a shift from "individualism" towards "communitarianism". Individualism emphasised property rights from which the corporate manager derived the authority to manage and which promoted the idea that the purpose of the corporation was to satisfy the owners, the shareholders. Competition among self-interested proprietors to satisfy consumer desire in the marketplace would produce a good community and the sum of consumer ideas would equal community need. Government would play only a limited role.
Communitarianism, on the other hand, holds that the community is more than the sum of the individuals in it, that it has special and urgent needs, and that the survival and self-respect of the individuals in it depend on recognition of those needs. It emphasises equality of opportunity and result, consensus, and the rights and duties of membership. The emphasis on market competition has lost some of its force. Firms now like to talk about being good corporate citizens instead of trying merely to justify their existence by profits. Market competition may be "wonderfully efficient" but without honest and responsive government, it may sometimes fail to meet community needs, especially for poverty reduction. Communitarianism therefore also involves an active, planning state.
The authors believe that, whether for good or bad, the world is inevitably converging around a communitarian theme. Communitarianism will be the language in which differences in the business world can be fruitfully discussed. Managers will therefore be better placed to anticipate and manage the future if they understand and speak that language.
The corporate social responsibility (CSR) movement is one manifestation of communitarianism. Farsighted managers have recognised that the source of their legitimacy has moved and that, alongside shareholder satisfaction and market competition, has come the servicing of community needs. If governments are unable or unwilling to define community needs and there is no world government to do so for the world community, then corporations must do so with the help of NGOs, self-appointed groups who have strong feelings about what the world needs.
As the old ideas concerning corporate legitimacy erode, various players – NGOs in particular – are moving to define and give institutional validity to the new ones. They are encouraging, assisting, and pressuring corporations to increase globalisation’s benefits and diminish its costs. This includes pushing MNCs to increase and improve the contribution they make to the reduction of global poverty.
Although sometimes described as troublemakers, NGOs are becoming more central to the evolving nature of MNCs. The style of NGO interaction with MNCs has changed and some NGOs now work closely with MNCs. Mostly, however, MNCs and NGOs regard each other as adversaries. NGOs’ attacks on MNCs mostly concern human rights and the environment. To harass and punish "wrongdoers", these "vigilante" NGOs use consumer boycotts, shareholder protests and publicity to name offending corporations and shame their managers. They also play an increasingly influential role in the UN and World Bank.
NGOs have been highly effective in using the media and other forums to promote their point of view. Large corporations have come to fear and sometimes respect them. There are now more than 40,000 international NGOs in operation around the world, 90% of them formed since 1970. (The Sierra Club, Greenpeace, Amnesty International, CARE, Oxfam, World Vision, M?decins Sans Fronti?res are some of the best known.) The authors describe NGOs as attackers, watchdogs and collaborators.
The attackers. Perhaps some 6,000 NGOs are of the "attacking" variety. MNC managers are often unsure how to respond to attacks by NGOs. The legitimacy of a global corporation used to be largely about obeying local law. This is no longer the case, especially as the NGOs see many local governments, in the developing world especially, as too weak or corrupt to be trusted.
NGOs attack corporations because MNCs are believed to have done harmful things and therefore need watching. Attacks are usually led by a consortium of NGOs rather than any single organisation. Examples include attacks on Shell’s activities in the North Sea and Nigeria, on McDonald’s global operation, on Nike and Levi Strauss concerning human rights, and on Philip Morris for promoting smoking in poor countries. The Rainforest Action Network forced Citigroup to adopt policies to reduce habitat loss and global warming. NGOs also thwarted efforts by the Organisation for Economic Cooperation and Development to create a Multilateral Agreement on Investment, an international umbrella framework to govern direct foreign investment.
Some NGOs are more interested in advocacy than others. Greenpeace and Oxfam are examples of well-known NGOs that influence community thinking, often through the media. (The authors suggest that the staff of major corporations who identify with the messages of NGOs are producing an internal change within MNCs.)
Watchdogs and monitors. Many NGOs are involved in lobbying work, humanitarian relief and social work. Governments and international development agencies now refuse to take the lead on many projects without the support of such NGOs as they feel uncomfortably exposed without some form of endorsement from "civil society". MNC managers often feel that the lack of a civil society "imprimatur" constitutes an absence of legitimacy even when there is no formal or legal requirement for NGO involvement. Major new projects often involve social impact assessments by NGOs as well as the usual engineering studies and cost-benefit analyses. NGOs may have small budgets and staffs but they are able to gather large audiences for their views and rapidly organise criticism of MNC activity, whether wrongdoing is proven or not.
Collaborators. Some NGOs pursue their objectives in cooperation with MNCs. The Washington-based Center for Global Development (CGD), for example, focuses on the effectiveness of international aid and the reduction of poverty in developing countries. CGD has developed an index for measuring and ranking the performance of a set of rich countries with respect to global development and poverty reduction.
Some smaller NGOs or local branches of international NGOs work at the country level with MNCs in developing countries. MNCs find these local partnerships easier to enter, more likely to produce results, and less subject to posturing than collaboration with large, global NGOs. As these working-level partnerships between MNCs and NGOs become more commonplace, there is a convergence of objectives between these two very different types of organisation. MNCs are taking more notice of social objectives; NGOs are becoming more business-oriented.
NGOs are becoming increasingly commercialised, adopting business-type practices and seeking revenue streams and profit sources to support their operations, while MNCs are adopting social and community objectives which they see as a way of gaining legitimacy and underpinning their mainstream activities. MNCs are more and more using NGOs as part of their business platform – like P&G which trained and assisted a local NGO in Haiti to distribute and market an additive for making drinking water.
Some NGOs develop close links with MNCs to help achieve their aims (like the Prince of Wales International Business Leaders Forum which focuses on disseminating best practice models for corporate social responsibility). Some NGOs are working more closely with business to which they were once antagonistic (like the World Resources Institute whose focus has broadened from environmental issues to include the alleviation of world poverty).
NGOs reflect a growing social consciousness rising in communities in which government is inadequate for the task and in which globalisation has inadequately defined and promoted community needs.
Pressed by NGOs and international leaders such as the UN Secretary-General to contribute more effectively to social improvements, MNCs have undertaken a wide variety of initiatives in response. The authors list the range of company responses: corporate social responsibility initiatives; industry codes of conduct; accession to agreed sets of behavioural principles; collaboration with the UN and other intergovernmental agencies; sustainable development initiatives; and "innumerable" international councils and committees. None as yet has made a substantial impact on global poverty.
The authors acknowledge that the CSR movement has produced some good results. It has encouraged MNCs to adopt safer, healthier, more environmentally friendly practices and to distribute the benefits of their activities more equitably.
But CSR is attracting critics who call it a "woolly" concept. Some critics say it does more harm than good in that it distracts investment and reduces efficiency and the ability to innovate. CSR is having a profound effect on investment decisions by some MNCs who won’t invest in a developing country or forge links to local suppliers where there are doubts about the prevailing CSR framework. If the firm finds an inadequate CSR framework in a poor country, it may decide not to invest there because of the risk to its global brand reputation. Firms do not want to be exposed, for example, to accusations of violations of human rights concerning their poor employees.
Industry codes of conduct include, for instance, the chemical industry’s adoption of safety standards following the Bhopal disaster and the Montreal protocol to reduce chlorofluorocarbons. Such codes of conduct, though voluntary, are almost becoming law and, where governmental institutions are weak, risk eroding the role of local government. They also sometimes threaten to undermine local traditions (such as the age at which children should work).
The International Organisation for Standardisation (best known for its ISO technical standards) has decided to develop a standard for corporate social responsibility. Although voluntary, this is likely to force a high degree of convergence of CSR behaviour across companies and countries. Some global firms have, nonetheless, gone ahead on their own. Shell, for instance, has adopted a Statement of Business Principles that includes consultation with NGOs. It spends huge sums in Nigeria on social programmes, hospitals, and schools, filling a vacuum left by the national government. However, because it is not the national government it lacks legitimacy so its generosity is under-appreciated.
MNCs in recent years have undertaken a wide range of CSR activities in both developed and developing countries, including gifts to charity, financial support for community events, protective workplace measures for employees, and publicity campaigns supporting social objectives. The reasons for doing so vary: a sense of benevolence, to improve brand and reputation, to ensure recognition among a target group, to reduce country risk, or to satisfy staff. In developing countries, some of these actions would be more self-sustaining or poverty reducing than others. They are nearly always based on managers’ judgement and experience rather than a provable financial model. MNCs inevitably ask questions about the benefits of such involvement, the financial costs and risks, and whether it is a distraction from mainstream activities.
MNCs are increasingly interested in making sure their CSR activities are efficient, make the most of the investment, and have a sustainable impact. It shows they are alive to the possibilities but need more evidence about different options to allow them to move forward with greater confidence. Companies see a link between their intangible assets (including CSR activities) and shareholder value, though this is hard to value. Proponents of CSR are trying to strengthen the business case for CSR efforts and this will make it easier for individual managers to advocate their implementation.
There has been a shift towards the development of partnerships between big business and development institutions. There are two reasons. MNCs, while hearing the calls for greater involvement in development, see they don’t have the legitimacy or often the expertise to do what is asked of them. International and governmental agencies realise they don’t have the resources or a mechanism for making sustainable business-based improvements to people’s lives. This indicates the gap in the "international development architecture".
While businesses are undoubtedly sensitive to the need to address societal issues, they are in general uncertain about what to do. They are also concerned about their responsibilities to their shareholders. Managers don’t like to be portrayed as bad and feel personal hurt at the attacks they sometimes receive. They need a way to reconcile the various forces and drivers and the threat posed to their legitimacy. They can do this by working to reduce poverty, measuring improvements, while at the same time meeting their obligations to produce a profit.
In recent years, most international development organisations have made poverty reduction a top priority. The authors sketch the current structure of governmental agencies and organisations devoted to international development to reveal a gap that needs to be filled if progress is to be made towards meeting the widely endorsed Millennium Development Goals and reducing global poverty.
International development agencies, owned, funded and controlled by the governments of rich countries, are broadly concerned with development and poverty reduction but their connection to MNCs is weak and variable. The agencies and their NGO counterparts have belatedly realised that MNCs can considerably augment their own disappointing efforts to reduce global poverty. While they have tried to develop more partnerships with business, they have failed to harness effectively the collective power of MNCs.
The reason for the weak connection between MNCs and international development agencies is ideological. Development is traditionally seen as the province of government, while business should be separate from government and is devoted solely to shareholder value. In reality business and government are intertwined and both are essential to development. Development must be the combined province of government, NGOs and corporations.
The authors review the main agencies to see where there is "traction" on the issue of poverty and where the gaps lie.
The problem is that investment flows to developing countries are not evenly spread and many of the poorest countries are missing out. Although the international development agencies have collectively adopted the overarching goal of global poverty reduction, they have not linked their efforts and objectives to the immense resources, capabilities and goodwill of the world’s global corporations. There exists no mechanism through which those capabilities can be fully brought to bear in the world’s poor countries. MNCs need practical means through which they can more effectively reduce global poverty and revive their legitimacy while maintaining earnings and an acceptable return on their investments.
The authors quote various figures concerning trends in world poverty. For example, the percentage of the world’s population living on less than $1 a day has almost halved from almost 40% to 21% and the percentage living on less than $2 a day has fallen from 66% to 53%. However, if the improvements in living standards in China were taken out of the picture, the situation would look much worse.
Much of the improvement that has taken place has been due to improved economic governance and liberalised trade and investment, but these improvements have not been great enough. The need for more active corporate involvement in the fight against poverty stems from two factors: the inadequacy of government and the nature of the system in which the poor are trapped.
Many governments lack either the desire or the capability to reduce poverty. In many countries, foreign aid has done no more than nourish the status quo, with the elite prospering and the poor slipping further into destitution. The World Bank and the IMF have preached free trade but open markets have often destroyed local cottage industries (while the US and Europe have continued to protect their agriculture and industries).
The only way to change the system is incrementally, locality by locality, using the skills, knowledge and access to the world markets that only global corporations can provide. Only business can help reduce poverty and only if it is an integral part of its profitmaking activities, not a "pro bono sideline". Only if poverty reduction is profitable will it be sustainable. What are needed are greater investment and more jobs; global firms have the means and reach to bring small local businesses into being, with the output of the smaller firms being demanded by bigger, normally foreign firms. But it is risk that stops MNCs from doing this.
The nature of the system that breeds poverty must be changed. Poverty, say the authors, is about more than income. It is a matter of power or not having it. Traditionally, "development" was thought of as an economic process to be managed by economists, and as therefore non-political and noncontroversial. But in much of the poor world, poverty reduction often means radical change – land reform, access to markets and credit, access to political influence; in fact, a reallocation of power. Development is therefore intensely controversial. It is not so much economic, it is much more political, social, cultural and psychological.
It requires "engines of change" such as the cooperative movement led by Bishop Marcos McGrath in a poor province of Panama. Engines of change have authority, the ability to communicate with even the most remote person, access to power to protect the change process from the status quo, and competence and the skills needed as the change process proceeds. The most efficient and sustainable engines of change are corporations. Examples include DaimlerChrysler’s involvement in Brazil’s poverty-stricken northeast where it cooperated with a community development project to build a high-tech factory making car seats from locally-sourced raw materials; Nestl?’s dairy operation in Panama involving several thousand farmers to produce powdered milk; the Shell Foundation which is working in Africa to support local enterprises that reduce poverty.
There is now among relevant institutions and key policy-makers a growing acceptance of the need for the inclusion of MNCs in the development agenda. Despite their willingness to respond and their potential to become engines of change, many MNCs are uncertain about the best way to go about it.
Those MNCs that move most adroitly and embrace change the fastest will benefit the most, as will their shareholders in the longer run. There are some preconditions for a successful MNC-led poverty-reduction mechanism. It must have a "demonstrable and measurable" positive impact that encourages independent replication by other firms. It needs the mandate to investigate and document the profound effect that MNCs have on reducing global poverty. Its activities must be sustainable and therefore profitable. It should enhance corporate legitimacy by carrying the stamp of approval of the UN or another intergovernmental organisation and a representative selection of NGOs.
The authors outline various options for businesses to consider if they decide to incorporate the objective of reducing poverty into their operations. For example:
The authors say there is evidence that companies who have innovated to improve environmental safeguards. eco-efficiency, organisational health and safety, and cultural and heritage protection, have benefited from better political support and higher profits at lower risk. The same, they say, will be true for companies that play an explicit role in poverty alleviation. MNCs already play an important role in promoting economic growth through their investments, wage payments, purchase contracts, and tax payments. Now they are being exhorted to pursue a broader range of human development objectives as part of their core business operations. MNC leaders must organise a legitimate way to achieve those results while remaining commercially viable.
It is essential for MNCs to act collectively, both to reduce the risk for any one corporation from a single investment, and to provide the range of capabilities required by poverty reduction. The authors therefore propose that a new institution be created by a select group of corporate leaders in cooperation with representative NGOs and the United Nations to address directly the issue of corporate involvement in poverty reduction.
The proposed World Development Corporation will be a non-profit corporation established under the auspices of the UN to harness the skills, capabilities and resources of leading global firms to reduce poverty and improve living standards in developing countries. Working closely with existing international development agencies such as the World Bank, the IFC, and NGOs, it will be managed by representatives of a dozen or so MNCs – the "partners" – at the invitation of the Secretary-General of the UN. The partners may invite other MNCs ("affiliates") to become financial and technical contributors to the WDC. Shareholders will provide the initial capital which will be augmented by funds from OECD governments and other development agencies.
The WDC will proceed experimentally, focusing on countries that have received little foreign investment and will help partners and affiliates initiate commercial projects that promise a maximum impact on poverty reduction. It will proceed project-by-project, gathering experience and conducting research on what has worked and what has not been so successful. WDC projects will serve the interests not only of the poor but also, in the long run, of corporate shareholders. Where the former are concerned, it will reduce poverty in those countries where poverty has been most resilient, where individual companies are reluctant to invest alone, and in which traditional foreign aid has been disappointing.
In terms of benefits for MNCs, it will safeguard their investments in poor countries against political instability. It will be a vehicle through which local suppliers and markets can be developed. It will offer MNCs a collective approach to development that both lowers risk and increases the chance of success. The WDC’s research will, for the first time, provide data on how MNCs best contribute to improved economic development and lowered poverty in developing countries.
Perhaps the most important benefit for MNCs, in the eyes of the authors, is that the WDC will greatly enhance MNCs’ legitimacy as they prove their effectiveness in meeting community needs. Although the corporation is now expected to pay greater heed to the needs of the communities it affects, including poverty reduction, and although it has the skills and capabilities to do so more effectively than in the past, it lacks the legitimacy to do so. The intervention needed to reduce poverty often means introducing change in a poor country that is seen as radical and threatening to the status quo; the MNC has a questionable right to introduce radical change.
The paradox is that in order to revive its legitimacy, the corporation is expected to do what is illegitimate. It therefore needs help. The answer is to give the corporation the legitimacy it needs that can be bestowed by the UN, the NGOs and the communities it serves, and to provide it with sufficient public resources to enable it to serve community needs and reduce poverty, without threatening its survival as a profit-making institution. The authors believe there is no other way to do this than by creating a World Development Corporation. "The poor will cheer its arrival", they say.
There are formidable obstacles to the creation of the WDC. These include continuing mutual suspicion between MNCs, NGOs and international development agencies, the persisting view that government and business should be kept separate, and perhaps some reluctance to create another global, bureaucratic "monster" (although the authors insist the WDC will have only a small secretariat and that it will be a "learning organisation"). Corporate leaders who are attracted to participating in the WDC will need to convince their shareholders, managers and staff that what they are doing makes sense, meets society’s expectations, is justifiable in outputs and outcomes, and really does add to the firm’s legitimacy. Despite all this, the authors believe there is a slow and inexorable movement in the direction of a WDC because it makes sense for all concerned. It will take time but it will happen, they say.