Magdalena Kowalska: What were the biggest global challenges that companies faced in 2014?
Paul Klein: I think that in addition to the challenges that businesses have always faced – access to capital, recruiting and retaining great people, differentiating from competitors, providing high quality products and services that address the needs of customers, innovation and so on – that more business had to contend with challenges to their “social license to operate”. That is to say, the intangible and evolving set of ethical, social and environmental expectations that stakeholders now place on companies which, when not adhered to, have the power to derail business operations. Until recently, the risk of losing your social license to operate was mostly confined to the extractives industry. Today, however, companies in sectors need to understand and live up to the new expectation of their stakeholders.
MK: In your opinion, what was the worst corporate “faux pas” and irresponsible step in 2014 and what caused the most relevant social change?
PK: This was in 2013, but I’d say the death of more than 1,100 people as a result of collapse of the Rana Plaza building in Savar, Bangladesh and the realization that the true cost for a T-shirt is a lot more than $5 is particularly irresponsible. Stemming from the global outrage that followed this tragedy, many global mass retailers took positive action to make their supply chains more responsible. Clearly, this was too late for many families in Bangladesh but I hope that the new approaches to ethical sourcing will help more people in developing countries to rise out of poverty.
MK: In one of your articles you mentioned that in the future companies will survive only if they solve big social problems. What are the positives and the risks for the company to fully integrate business goals with social goals?
PK: The potential is for companies to solve big social problems in a way that is indivisible with who their business is and what it does. At the most fundamental level, that includes helping to reduce unemployment, improve health outcomes, increase food security, improve family and community resilience, and reduce crime by hiring locally and contracting with local entrepreneurs. In addition, many companies make products or provide services that contribute directly to solving social or environmental problems – such as micro-credit and developmental lending, low or zero emission automobiles, clothing that repels mosquitoes and reduces malaria and so on. The risks of not paying attention to the new social purpose of business include loss of social license to operate, reduced access to capital, reduced competitive advantage and, ultimately lower sales and profitability.
MK: Doesn’t it give corporations more power to rule the world then the democracy should allow? Looks like the corporations are naturally taking the piece of cake that so far was reserved for politicians.
PK: In some cases corporations are definitely contributing to the public good – a territory that used to be reserved for governments. The reality is that governments have many interrelated problems that limit their ability to be effective – these include inefficient operations, an archaic model of funding that’s based on inputs rather than outcomes, and the tendency to be self-serving and opportunistic related to their prospects in the next election. Further, the social costs for governments around the world are increasing significantly at the same time as their revenue is decreasing. This means that governments are actually embracing the prospect of more involvement from the private sector. More cynically, I’d say that governments see the increased involvement of business in social change simply as a way to save money.
MK: Speaking of social change, who should take the biggest responsibility for leading the change – CEOs, entrepreneurs, CSR leaders, managers, NGO’s?
PK: Change needs to happen at all levels, but I think that leadership starts with the CEOs of large public corporations who have the vision and courage to link the future of their companies vision with solving social issues. I think this is particularly important because it’s so difficult for people in these executive positions to do this – they answer to many masters including the board of directors and institutional investors most of whom still look at business performance only through the lens of short term profitability. Entrepreneurs have fewer constraints and NGOs are already in the business of social change. Increasingly, there are more social entrepreneurs who start companies explicitly for the purpose of business value and social change.
MK: What is the role of corporate philanthropy and how will it change in the future?
PK: Today corporate philanthropy is under close scrutiny and this will continue. On the one hand, executives recognize that, with few exceptions, that philanthropy is a cost without related return on investment. This is an anathema to business. On the other hand, re-allocating all philanthropic resources to more measurable business/social investments is seen to be risky from a reputational point of view. What CEO wants to announce that her company is no longer contributing to charity? My view is that corporations will start to shift some of their philanthropic resources to other areas including investing in social enterprises, b-corporations and social purpose business that generate profits and have a social purpose.
MK: The recent survey “The service or business. The role of financial institutions in society” conducted in Poland showed that the vast majority of Poles don’t trust financial institutions. How is the finance sector doing in Canada/US in the field of social responsibility?
PK: Most importantly, the biggest constraint for corporations in this sector is that they are limited from utilizing capital to solve social problems because of a low tolerance to risk. That means that financial institutions are not able to lend money or provide other financial products to increasingly large numbers of citizens including immigrants, Aboriginal people, single parents and other vulnerable people. The result is that many people with the potential to start businesses and improve their lives aren’t able to do so because they don’t have access to the financial products and services they need. The finance sector in North America should be leaders but are mired in an antiquated model of philanthropy that is a proxy for more productive uses of capital.
MK: What are the three most important challenges for the global finance sector in 2015?
PK: 1. Maintaining a social license to operate in the context of an increasing awareness among the public and other stakeholders that a high level of social inequity stems from old models of lending from which financial institutions benefit at the expense of vulnerable people. 2. Reconciling a lack of social innovation within the finance sector with the many remarkable accomplishments of customers including social entrepreneurs and NGOs who operate social enterprises. 3. Addressing the social priorities of millennials. The financial sector’s newest generation of employees are motivated by more than money. This means that recruitment be continue to be challenging, that traditional compensation packages may not translate into better retention and that it will be more important than ever for corporations in this sector to have and deploy a distinct and genuine social purpose.
MK: Are you optimistic about what 2015 will bring? What can we expect in 2015 in the field of corporate social responsibility?
PK: I’m very optimistic – more so than ever because of the increasing link between the business of business and the need for social change. In this context, corporate social responsibility will continue to be marginalized within the business community in favor of initiatives that are more material to driving business value in a way that also contributes to social change.
MK: Thank you.
Paul Klein is an internationally respected authority on the social purpose of corporations and civil society organizations. Paul is the president and founder of Impakt, a global consultancy that helps corporations and non-profit organizations become social purpose leaders. He also writes about corporate social responsibility for Forbes and The Guardian. Paul was included in the Globe and Mail’s 2011 Leading Thinkers Series, serves on the Advisory Council of the Centre of Excellence in Responsible Business at the Schulich School of Business, and was recognized as one of Trust Across America’s Top 100 Thought Leaders in Trustworthy Business Behavior.
Magdalena Kowalska is the advocate for corporate social responsibility, social entrepreneurship and philanthropy. Magdalena works for Bridge, helping companies with developing and implementing communication strategies, as well as managing PR projects. She graduated in Polish Philology from the University of Warsaw and holds a Postgraduate Degree in PR from the Warsaw School of Economics and in CSR from Kozminski University.