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CORPORATE RESPONSIBILITYC CORNER

Scandals can change business practices

THE REPUTATION of some global companies is again seriously damaged. The current crisis is a result of the activities of greedy investors who created non-transparent products which were not regulated by anyone. Media compete in revealing unethical practices by top managers which, along with public pressure created by such revelation, forces healthy discussion and self-examination. Business conduct has been in urgent need of such discussion because it needs to change now, just as it has changed several times in the past.

THE REPUTATION of some global companies is again seriously damaged. The current crisis is a result of the activities of greedy investors who created non-transparent products which were not regulated by anyone. Media compete in revealing unethical practices by top managers which, along with public pressure created by such revelation, forces healthy discussion and self-examination. Business conduct has been in urgent need of such discussion because it needs to change now, just as it has changed several times in the past.

In the 1970s, pressure on multi-national corporations intensified as representatives of developing countries, together with unions and activists in the West, called for a so-called ‘new international and economic order’ which included more control over the behaviour of big companies operating in developing markets.

Firms reacted. In their effort to avoid criticism and further regulation, they began reducing exploitation in developing countries and increasing respect for human rights, social justice and environmental protection. These activities have gradually grown into sophisticated corporate responsibility (CR) programmes through which companies eliminated questionable practices not only in their own direct branches but also throughout their entire supply chains. Suppliers in China, India, Brazil or Russia must now undergo various audits of social and environmental standards in order for them to do business with supranational corporations. Global brands are harmed by global scandals.

In 1996, a photo in Life Magazine featuring a boy sewing a football for Nike caused a huge scandal. The report stirred intense discussion about abusive child labour and led to the introduction of new global rules. At the same time, activists across the world were reacting to the execution, by the military dictatorship then in power in Nigeria, of activist Ken Saro-Wiwa and eight other people who had alerted the world to the fact that oil extraction by Shell in the Niger delta was damaging the lives of its inhabitants. The events strongly damaged the oil company’s reputation. Since then, Shell has striven to present itself as a firm with respect for human rights and sustainable development.

On the verge of the new millennium, economists joked that the wisest investment was to drink a lot and to recycle. If one invested $1,000 in Enron shares, in one year the investment had shrunk to only $16.50 and if one had invested the same amount in WorldCom, the investment shrunk to $5. But if someone invested $1,000 dollars in drinking Budweiser, the person could have earned at least $214 on the returned bottles. The accounting frauds at Enron and WorldCom became symbols of lost ethics and corporate corruption which also damaged several other companies, including one of the biggest auditing firms, Arthur Andersen. Top managers, in order to get to huge bonuses, had created lies upon lies. Due to a series of similar accounting scandals, the US Congress passed the Sarbanes-Oxley Act which gave investors greater protection, tightened the control and responsibility of top managers and strengthened the ethical dimension of business.

Its enactment has caused enormous costs for companies across the globe. In 2002, groups of vegetarians successfully sued McDonald's for labelling their French fries as vegetarian food. The film Super Size Me suggests that McDonald's’ menu has contributed to the epidemic of obesity. The company reacted to the pressure of the public criticism and limited its super-sized portions. It also included healthier offers on its menu.

In 2006, Siemens, the German technological giant, became a synonym for company corruption for many Europeans after a big bribery scandal was uncovered. The firm ran “black” accounts, worth hundreds of millions of euros in various countries over a long time, its employees prepared fictitious contracts and made suspicious payments for various consultancy services. Several top managers faced court trials and then had to leave the company. After this scandal, not just Siemens, but also a series of other firms, markedly strengthened their internal controls and implemented strict anti-corruption rules. Company scandals have changed the way enterprises work. Nike learned its lesson – as one of the first of firms under the microscope of public opinion – it has installed a vice-president for corporate responsibility, it is implementing a strong CR programme, and is in this way preventing a boycott of its products.

Greater corporate responsibility has always flourished just after a scandalous period in which companies faced public criticism and calls were made for stronger regulations and oversight. Some firms have found out that from the longer-term view, it is beneficial to be perceived as a responsible neighbour and to invest part of one’s means also in improving one’s own environment. A brand positively perceived by consumers multiplies sales and the market value of the firm.

Introducing strict ethical standards, minimising environmental impacts, creating an accommodating workplace for employees, fair communication with clients and good quality products and services prevent recurrent scandals, potential huge costs and more government control.

The free market has a magic feature of self-purification. The current crisis is the answer of the market to the wrong steps which some banks, funds and developers implemented in recent years with help from the state. Public pressure forces firms to react and to persuade stakeholders that they have learned their lesson and that they are doing business in a more responsible way, even without limiting state regulation. Perhaps the financial crisis and the related scandals will inspire strong programmes that support corporate accountability, transparency of products, control of investment and responsible behaviour in the market.

Flexible firms in Slovakia are also developing their own programmes through which they try to eliminate negative impacts and the risk of potential scandals. This year, Tesco in Slovakia won the award Via Bona for its responsibility towards its environment. In Slovakia it has built more environmentally friendly stores, included more healthy foods among its assortments and has gradually exchanged its often-criticized, ever-present plastic bags for ecologically decomposable variants. Slovnaft, Skanska, Holcim, US Steel, Enel, and Slovakia’s energy distributors are making their production greener and, for example, Orange Slovensko is providing education and lectures on the risks of children using mobile phones.

Pavel Hrica is the programme director of The Pontis Foundation

Topic: Corporate Responsibility


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