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Return to core business:
are we neglecting business competencies in the pursuit of
poverty reduction?
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Wednesday
23 October Meeting Report
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sponsored
by
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Speakers: Eibhlis Hood, BP
Dr Michael Warner, Overseas Development Institute
Chair: Tim Cullen, TCA Consultants
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1. Tim Cullen - Director of consultancy firm in Oxford,
specialising in governance and sustainability issues; with
21 years at the World Bank, six of those as the chief spokesman,
and three as a senior advisor to Mark Malloch Brown.
2. To frame the discussion, it was noted that on the one
hand Corporate Social Responsibility (CSR) purists argue the
moral imperative for companies to engage in social issues,
and that the potential for increased profitability and reduced
risk is secondary; whilst on the other hand there are those
who believe CSR distorts the market by deflecting business
from its primary role of profit generation. Referenced was
David Henderson, former chief economist at OECD, who has claimed
that the 'fad' for CSR is doing real harm: privatising public
policy and hence removing governments from their core responsibilities
3. Michael Warner opened by describing how the landscape
of CSR had changed since the World Summit on Sustainable Development.
The summit clearly positioned the corporate sector as a vehicle
in the delivery of poverty reduction targets in the developing
world. The question now was no longer 'whether' multi-national
corporations should be involved, but 'how'. To illustrate,
Kofi Annan (FT, 2nd Sept): "The corporate sector need
not wait for governments to take decisions...we realise that
only by mobilising the corporate sector can we make significant
progress"; Margaret Beckett (Independent, 27th Aug):
"We need to ensure that Johannesburg generates a step-change
in how we tackle these problems [of global poverty]".
4. Businesses can think about how they might deliver such
a step-change in at least three ways. First, the current imprint
of business on society in low-income countries is often sub-optimal.
Dividends are often not re-invested in the country or region;
tax distribution is poor, and even if it reaches the principal
region of operations it may not then benefit the most poor;
products and services can often be priced out of the range
of the poor; direct employment (and related employee benefits)
usually goes to the educated elite; and the barriers to entry
into supply chains are high. Acknowledged are efforts to address
some of these constraints; notably the Ethical Trading Initiative,
research at ODI on FDI incentives and wage impacts, and examples
of pro-poor products from Unilever and Standard Bank. However,
it is of interest that the most recent methodology for assessing
the development impact (ERR) of investment projects published
by the International Finance Corporation recognises that "the
impact of the project specifically on the poor is not directly
addressed in the assessment methodology"
5. Secondly, in the context of CSR, the social performance
of many companies is likewise sub-optimal, with a lack of
understanding that in low-income countries the CSR model has
to be modified. For example, at present, and to generalise:
charitable gifts and foundations bring only limited benefits
to the poor in of scale; environmental and social impact assessment
and management approaches focus mainly on the avoidance and
mitigation of 'negative' impacts; and voluntary community
development projects tend to act as 'islands of excellence',
directed at those communities most adversely affected as a
form of compensation, and uncoordinated with provincial and
national strategies for poverty reduction.
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6. A third approach, and one which would strengthen both the
first two, is the realignment of more of the core business
competencies and resources of the business with national and
provincial development priorities. Such competencies include:
production technology, employee health, operational infrastructure
(power, water, roads, telecommunications), borrowing capacity,
distribution networks, project/contract management, market
research and marketing, product R&D, human resource development,
financing and accounting expertise, administration and legal
expertise and HSE management. The business-case for this 'core
competencies' approach falls into three parts. The approach
draws down on the existing cost base, rather than introducing
new fixed costs and so should be more cost effective and less
risky that some current social investment approaches which
require the building of in-house community development capacity,
or outsourcing to consultants or NGOs. Further, aligning competencies
with provincial and national development priorities offers
a greater chance of gaining strategic business benefits such
as capital (infrastructure) cost savings or market access,
as well as increasing the prospects of finding public sector
partners with whom to share the cost burden and risks, and
who might assume responsibilities overtime allowing the company
to reduce its liabilities in the longer-term.
7. Two examples of a core competencies approach were given.
(1) A gold mining company in Venezuela contributed its resources
originally intended for developing on-site employee health
facilities to a District-wide programme of health care, leading
to a 400% leverage of additional resources and higher quality
and more sustainable health care provision for a population
of 12,000 including potential mine workers. (2) A coal mining
project in India, where the costs of constructing operational
road infrastructure was shared with the District Government
in alignment with public policy for improving the road network.
In addition, the costs and liabilities of long-term maintenance
were transferred to government through a vehicle use toll,
leading to a new income stream for the District Authorities
and employment opportunities for local communities along with
faster access to schools, a health centre and local markets.
8. To embed a core competencies approach requires bringing
these resources along-side the conventional business imprint
on society and the social compliance and voluntary social
projects aspects of CSR, to embrace a 'whole of business model'.
The aim is then to develop a business management tool that
enables managers to select the 'most optimal' social performance
strategy based on balancing a strong business case with maximum
development impact.
9. Eibhlis Hood began by directly answering the question
posed in the topic - are we neglecting business competencies
in the pursuit of poverty reduction with a "tentative
yes". Tentative because in the competitive business environment
in which BP works, the financial markets are looking for short-term
results, quarter by quarter, and our resources are stretched
to the maximum. So BP has to be careful about what it gets
involved in and why. The link between business objectives
and development objectives has to be transparent.
7. BP doesn't have the competencies or the remit from its
shareholders to be something like a development agency. Yet
the company cannot ignore the consequences of poverty that
affects its businesses around the globe. Consequences that
cause social exclusion, lack of choice, freedoms and rights
and, core to our business, the lack of access to affordable
energy. The ultimate consequence of all of these things can
be conflict - the most destructive and desperate way of getting
your interests recognised. Many of the areas in which BP work
are zones of conflict.
8. For companies such as BP, the causes of poverty are not
well understood, and that's where we need to partner with
others to address these issues. Business has a lot of good
qualities to share. They are good at delivering business results;
are organised and efficient, performance-driven; clearly accountable
against goals and targets and are always aware of the competition
"nipping at our heels". They deliver complex projects
in technologically difficult circumstances on-time and on-budget;
have access to IT, finance, engineering, technology, human
resources; and have networks and connections that stretch
across the globe. The challenge is to find ways to extend
this value to the poor.
9. Business and the pursuit of poverty eradication are not
mutually exclusive. BP has to search for and exploit the overlaps
between the need to maintain a commitment to financial markets
in terms of business performance, and to society in terms
of creating responsible and sustainable opportunities for
reducing poverty. There is a need to find the right projects
and the right partners.
10. BP's business creates benefits for society right now
- employment, investment, taxes. It also provides a product
that is at the core of development - energy. Energy provides
heating, lighting, power for industry and so on. The Johannesburg
conference highlighted the fact that two billion people were
without adequate access to energy services. There must be
a business opportunity for a global energy company here. By
signing up to the EU Energy Initiative for Poverty Eradication
and sustainable development, as well as the Global Village
Energy partnership, BP has committed to exploring these areas.
BP needs to be innovative about how it engineers business
opportunities in low-income countries, for example, partnering
with others to alleviate poverty by improving access to energy.
11. To give an example. BP has been working in Brazil - where
20 million people don't have access to energy. BP is working
with the Brazilian government to bring clean energy to a remote
part of North East Brazil. By providing solar systems to over
1,800 schools in the region - providing power for heating,
lighting and refrigeration - the Prodene project. Part of
the project has involved training local business to install
and maintain the equipment - a transfer of skills that has
been avidly taken up by local people who are creating further
new applications. This is an ongoing successful partnership
between business and government; and this is a business deal
for BP, not philanthropy, but one that also provided benefits
for society. A win-win situation.
12. And what of the bigger issues affecting upstream oil
and gas projects? BP has tried to understand the impacts of
its business on society through social and environmental impact
assessments and ongoing dialogue with communities. We are
learning how to deal with social risks and how to mitigate
them, and have learnt to turn risk into opportunity. Simple
things like digging additional drainage ditches for farmers
when we're laying a pipeline is one small example of this.
13. Oil and gas projects require vast amounts of capital
to be invested over relatively short spaces of time in order
to create revenues that may last for more than thirty years.
The up-stream part of our business (oil exploration and production)
is a long-term game, so working in low-income countries poses
significant risk to shareholder value. BP is transitioning
from a portfolio of mainly OECD-based assets to one biased
towards the developing world. By 2007, about 70% of our upstream
investment will be in developing countries. To be successful
in this longer game we need to understand the socio-economic
issues that operate in these environments. We need to understand
the causes of poverty so we can leverage our investments to
benefit a greater number of people.
14. Another example: China's energy needs are currently largely
met by coal, a dependency that's caused extensive environmental
damage. The speedy introduction of cleaner fuels to the Chinese
economy provides BP with a business opportunity. At the same
time BP has worked with the Chinese government to share knowledge
on environmental issues, leading to the introduction of a
new curriculum subject in schools. This project reaches about
a million children a year, which we hope will progressively
improve the environment in China in more diverse ways than
just cleaner fuels. It also builds a link between BP and the
Chinese government which we hope will contribute to further
business deals.
15. These are examples of how BP goes further than its own
business interests, sharing its competencies in order to improve
the underlying environmental and socio-economic conditions
in a country. These examples point the way forward, but we
have a long way to go. The lesson learnt from working with
BPD (Business Partners for Development) gave us valuable insights
into partnerships and how to manage them to the best effect.
The outcomes from the Johannesburg World Summit underlined
the importance of partnerships, but now BP needs to become
more adept at choosing partners to work with over the long
term - partners with complementary competencies to our own
and with whom we can work for a long time, because these issues
will not be solved quickly.
16. Finally, this points to a core issue that we'll have
to address in BP - the dilemma of the long-term nature of
some of these initiatives compared to the short-term focus
of the company as it stands today. But that's a whole new
topic.
17. Discussion - A number of points were raised:
a. With regard to working with local NGOs and building
their capacity, does BP enable access to independent information
on its investments and how they came about? This is in the
context of land acquisition for the LNG Tangguh Project prior
to BP's involvement.
b. What does BP do in cases where the local population
clearly do not want the investment on their land? Eibhlis
Hood - where practicable BP use technology to work around
these issues.
c. Important to recognise energy as a driver for reducing
poverty. There is an intellectual vacuum on how to deal with
a lack of electrical power. In terms of poverty reduction,
small enterprises are very important.
d. The core competencies approach seems to be asking
companies to do more, and yet BP is saying that the private
sector could not do it alone. Michael Warner - The
origins of this core competencies idea comes from the BPD
programme where we found that when partners sat around the
table, the one party that didn't know what they were bringing,
apart from cash, was the company. The approach is therefore
not about companies doing more, but about more intelligently
linking the core competencies of companies with those of the
public sector, communities and NGOs to jointly deliver poverty
reduction strategies at the national, regional and local level.
e. Where is the business case for companies such as
BP in deploying more of their core business competencies in
pursuit of poverty reduction? Eibhlis Hood - In the
case of Colombia, the business case for BP is in trying to
create a viable economy within the region of operations for
when the oil eventually runs out. It is about trying to diversify
the economy because the huge dependency on oil in the region
is unsustainable. Michael Warner - Increasingly the
World Bank and others are working with developing country
governments to help shape the performance criteria of investments
in the future. Looking down the road in five or ten years,
it is likely that developing country governments will say
that they want to see 'social' performance criteria embedded
in investment agreements. These criteria are going to come
from PRSPs, regional development plans etc. So, in the future,
companies are going to have to deliver, in part, against poverty
targets in order to win their next concession.
f. "I think you've have got to get real".
Business is in business to make sure shareholders get a financial
return. Unless there are incentives for this type of social
responsibility there is nothing in it for business.
g. Shell representative - "I have worked in countries
where local youths have demonstrated because they wanted a
job and couldn't get one. They can shut down your production.
That is the business case for doing things like this".
h. Tim Cullen - a conclusion of the BPD programme
was that a lot of companies working in extraction or water
found that their costs were actually lower because they were
involved with partners from civil society.
i. There is a need to move the onus back to nation
states and the multi-lateral system to ensure that incentives
are in place that encourage companies to assist in poverty
reduction.
j. All these comments lead us in the same direction: we need
to understand better how these partnerships (between business,
government and civil society) can work and what constitutes
good practice. I think the BPD model is a very good one, and
I'd be interested to know whether BP has any others.
k. CSR should use more of a core competencies approach because
businesses are struggling to find efficient ways of integrating
CSR into their core business. Businesses need to look more
at the opportunities inherent in CSR rather than just compliance.
18. Michael Warner - the new programme at ODI is about
being more 'selective' in designing social strategies and
about identifying where there is a business-case for deploying
core competencies. We do not need more case studies to demonstrate
this. There are 130 partnership examples from the World Business
Council for Sustainable Development. We have another ten from
the BPD programme. There is a lot on the table about how you
do this. What I think is missing now is the means to scale
it all up.
19. Eibhlis Hood - It is the issue of scaling-up that
is facing BP at the moment. We are good at doing things with
the local communities, but how do we bring this to scale so
as to have a far larger impact?
20. Tim Cullen - The way to get companies interested
is to show them that CSR is profitable. The approach outlined
today is a sound framework. Once you've drawn them in, they
discover that they can actually do much more.
Jon Fowler and Michael Warner, ODI
25th October, 2002
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