Growth vs. Equality? Laura Tyson speaks out at Davos

Laura D. Tyson, director of the Institute for Business and Social Impact, spoke out on the link between economic growth and inequality at last week’s World Economic Forum in Davos, Switzerland.  Here is a transcript and audio file from an interview she gave afterward.

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Among her points:

*When asked whether inequality is likely to keep increasing, most people in the forum were resigned to the idea that it will.  Few people even wanted to use the word “inclusive” in talking about the issue.

*Technology is probably aggravating inequality, but it isn’t getting enough recognition as a contributing factor. Tyson agrees that technology often creates new job opportunities, but says the trend of late has been for advances to create part-time, low-income jobs that displace full-time jobs — especially in service industries.

*On a more positive note, Tyson hears very strong support for the importance of increasing gender equality and for the view that gender equality contributes to stronger economic growth.

Confronting Corruption: Advice from the Front Lines

On Feb. 6, at the request of the White House, the Berkeley-Haas Center for Responsible Business will host one of four regional dialogs on President Obama’s call for a National Action Plan on Responsible Business Conduct for US companies operating abroad.

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One issue high on the agenda will be how US corporations confront corruption and bribery, a problem that can be pervasive in some countries.

How does a corporation deal with demands by a government official for “speed money” to get a license issued or a permit renewed? What about a politician who demands money to settle a labor dispute he helped engineer? How does a company combat internal corruption, such as employees who demand kickbacks from vendors?

Ravi Venkatesan, a former chairman of both Microsoft India and Cummins India, offers tough-minded insights on exactly these kinds of problems in a recent article for the McKinsey Quarterly.

“The hardest issues for ethical multinationals…are rarely the big-ticket scandals and scams that make the headlines,’’ Venkatesan writes. “Rather, it’s the subtler and more pervasive forms of fraud and corruption, such as pressures for payments on routine transactions.”

He calls these the “quiet killers of ethical business practices,’’ and warns that small and seemingly innocuous lapses can snowball into very big problems if they become viewed as just the cost of doing business. Corruption breeds more corruption, which is bad in itself for a corporation, but it also exposes companies to political backlash and prosecution by the host country as well as by the United States.

Indeed, the US Justice Department and the Securities and Exchange Commission have stepped up prosecutions under the Foreign Corrupt Practices Act. The government collected $635 million in penalties under the FCPA in 2013, and in 2014 two of the biggest FCPA settlements of all time: $772 million from Alstom SA and 384 million from Alcoa, both for alleged bribery in Bahrain.

You may not be surprised at Venkatesan’s broad conclusion: the best way for corporations to protect themselves is by going well beyond the letter of the law and establishing a culture of ethics from the top down.

But Venkatesan offers a number of shrewd insights and practical tips for dealing with demands for bribes and “speed money,” extortionists who make threats against companies, and corrupt employees inside the company itself.

The first step, he argues, is that a corporation’s CEO and other top leadership send an utterly unambiguous message about what does and does not constitute acceptable practice and about enforcement.

That means establishing a detailed code of conduct, and making sure that everyone inside the company understands it. It means making a sufficient investment in compliance, especially in countries where corruption is widespread. And it means taking swift and firm action against managers who either violate the rules or turn a blind eye. (A fraud survey by Ernst and Young found that only 35 percent of companies had taken action against employees.)

Venkatesan acknowledges that resisting corrupt demands can entail real costs: lost business, approvals that take more time, angry government officials. To that end, he offers practical advice.

*If a company’s local CEO faces demands by a politician who makes “credible threats,” such to stir up a violent labor confrontation, he or she should not deal with the problem alone. Country managers should discuss it with their global chief executive and the legal counsel at headquarters. They should also have a strong network of local advisers, perhaps even a special board of advisers who know the landscape.

*Don’t assume you have to capitulate. ”Bear in mind that extortionists are usually solo actors without institutional backing: it is often possible to call their bluff, which, in my experience, helps a company cultivate a reputation for honesty and acts as further protection against future demands.”

In some countries, Venkatesan acknowledges, it is almost impossible to carry out routine business without running into demands for “speed money” or grease payments. This often spawns industries of “facilitators” who act as intermediaries for making payments.

“Almost no one will officially admit to paying speed money, but the uncomfortable reality is that there may be no alternative for a business that needs to keep operating,” he writes.

If a company can’t avoid hiring a “facilitator,” Venkatesan urges it to be clear at the highest levels about what is happening. The company should make sure the intermediary is providing a real service, beyond making payments. Second, it should explicitly account for every payment to an intermediary and have all transactions vetted by legal experts at the company’s global headquarters. “From the perspective of the multinational,” he writes, “nothing should be under the table.”

Venkatesan also cautions companies against under-investing in compliance or skimping on compliance staff.

Compliance enforcement is a cost-generator, not a profit generator. But even companies that are serious about ethics may allocate money for compliance on a rigid formula, such as a particular ratio of the business unit’s revenues. That formula may be appropriate for operating in Germany or Switzerland, but it may be woefully inadequate for an emerging economy where corruption is more endemic.

Ultimately, it’s up to a corporation’s top executives at the global headquarters to establish a culture and a track record of uncompromising ethical compliance. Indeed, a reputation for rejecting bribery demands can go a long way to inoculating a company against them.

“CEOs must ensure that every employee in every part of the world is utterly clear about what conduct is acceptable and what is not,’’ he writes. “Over time, people will know what is acceptable here and what’s not. Social memory is many times more effective than a bunch of policies.”

New Research: The Link Between Private and Public Happiness

Policy makers and economic scholars are increasingly searching for measures of national success that go beyond gross domestic product, and many are looking at measures of happiness and well-being.

The problem is defining “happiness.” The standard approach so far has been to simply ask people how good they feel about their lives. The answers tell you something, but they don’t reveal much about why people do or do not feel happy — or what might make things better.

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A new survey by five economists, led by Daniel J. Benjamin of Cornell University and the University of Southern California, offers surprising insights on that. You can read their summary of the study here at Voxeu.org.

What the survey reveals is that the public and policy elements, such as how well a society takes care of others, rank surprisingly high in people’s evaluation of their own well-being.

The survey asked people to indicate the value they placed a long list of potential elements to their well-being. These included standard “private” components, such as personal health and financial security, but also “public” elements such as freedom from corruption and injustice or a society’s willingness to help the poor.

The researchers began by asking respondents to rank the importance of both the personal and public aspects of issues such as health.  For example, people were asked to rank the importance of their own health to their happiness, but also the importance of policies that promote public health. In addition, they were asked to rank the importance to their well-being of purely public policies, such as freedom of speech or the ability to participate in the political process.

As you might expect, respondents put a high importance on indicators of their own personal well-being.  But they also put a high value on policies to support the well-being of others. Some of the public-good elements had some of the highest ties to well-being. Among the most highly valued indicators of happiness were freedom from corruption and injustice; being in a society that is willing to help poor people; and having freedom of speech.

In other words, the paper suggests that happiness and well-being stem from much more than individual health and wealth. It turns out that people also want to feel good about the society in which they live. A big part of a person’s sense of well-being is tied to the feeling of living in a just and caring society.

Beyond Yourself: Moving Management from Amoral to Moral

Editor’s Note:  This post was excerpted from the Center for Responsible Business.

By Robert Strand, Executive Director of the Center for Responsible Business

The holidays have the great potential to bring out the best between friends and strangers alike. During the holiday season, I often witness expressions of goodwill between people – whether they know one another or not. This makes me feel good and inspires me to attempt to do some good in this world.

I am not alone. Irrespective of whether one identifies with a particular religious creed, the vast majority of us look favorably upon individuals who consider others and attempt to do something (however small it may be) to improve the well-being of other people. It makes us feel good to see acts of kindness because of that wonderful human emotion of empathy. (Empathy helps to connect our self-interest with the interests of others. I wrote a little about the importance of empathy in my previous blog post.)

Considering the well-being of others and taking action to improve the well-being of others is summed up concisely in the Berkeley-Haas defining principle of BEYOND YOURSELF.

In a classic article, “In Search of the Moral Manager,” the legendary CSR scholar Archie Carroll hypothesizes proportions of managers who do, and do not, think beyond themselves. Carroll roots his thinking “based on reports of management behavior, studies of ethics, and experience in teaching ethics in executive development programs.”
In sum, Carroll asserts that the vast majority of managers behave “immorally” or “amorally” – which is to say the majority of managers do not think beyond themselves.

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In defining immoral managers, Carroll states the underlying motivation of these managers is selfishness whereby “management cares only about itself or the company’s gains.” In defining amoral managers, Carroll asserts such managers may be well-intentioned but effectively behave selfishly because “impact on others is not considered.” To illustrate his hypothesis, Carroll draws a bell curve distribution and labels the tail to the far-left as “Immoral Managers” and the big fat middle of the bell curve is labeled “Amoral Managers.”

While the words immoral and amoral are often used interchangeably in common speak, Carroll takes care to distinguish. Whereas immoral managers choose to behave in a selfish manner (and feel justified in doing so), Carroll claims that amoral managers lack a degree of ethical perception and moral awareness – and may be “morally careless.” In other words, amoral managers go with the flow and do not necessarily question the status quo. Given that the dominant narrative of business has traditionally been that the purpose of business is to make profits, amoral managers will effectively act in a manner similar to immoral managers.

I would like to introduce a slightly more nuanced view to the important discussion teed up by Professor Carroll. Each of us is a complex being with the capacity to behave (using Carroll’s terms) immorally, amorally, and morally throughout any given day. This means that any given manager may bounce around between these categories everyday depending upon the degree to which they consider the well-being of others while making different decisions.
I propose to adapt Carroll’s framework to consider responses by business people on an issue by issue basis. In the forthcoming textbook titled “Corporate Social Responsibility” due out in January 2015, I authored the chapter “CSR and Leadership” in which I introduce this adaptation illustrated by a bell-curve distribution in which businesspeople respond to a particular issue with “don’t care” (akin to Carroll’s immoral), “unaware” (akin to Carroll’s amoral), and “aware and care” (akin to Carroll’s moral).

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I feel this nuanced view is important because a manager cannot be aware of every single stakeholder who could be affected by a decision that he or she takes. There are simply too many issues and too many stakeholders. This is particularly the case for managers of large, multinational corporations where stakeholders are spread throughout the world.

What is most important is that managers are “aware and care” where their decisions can have the greatest impact on their stakeholders. To achieve this “aware and care” state for the most material issues, managers must become adept at performing materiality assessments to identify the most relevant issues and associated stakeholders impacted by their decisions.

At the core of good material assessments is the asking of questions to highlight issues and stakeholders who may have otherwise gone unknown. For those managers who tend to think beyond themselves, this is an ongoing exercise.

On its surface, Carroll’s assertion that the majority of managers do not think beyond themselves may seem disheartening. However, given that the big fat middle of the distribution are managers who are simply unaware of their impacts on others – there is hope. We can help to shift more managers from “unaware” toward “aware and care” for issues that matter by working to usher in a new narrative of business where considering the well-being of others becomes part of the mainstream management thinking. In this view, profits become the byproduct of a well-run business – and not its ultimate purpose.

The Berkeley-Haas defining principle of Beyond Yourself is a wonderful concept to help achieve this. This principle also helps to set apart Berkeley-Haas business students. But thinking beyond yourself need not only be for students at the Haas School of Business – and thinking beyond yourself need not only be for the holidays.

We invite all people from the business community to challenge the dominant narrative of business and usher in a new era where sustainable and responsible business becomes the mainstream. Together, let us make the principle of thinking beyond yourself a year-round mode of thinking throughout the business community.

Laura Tyson: What Obamacare Tells Us About Achieving Social Impact

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At the Institute, we consider it axiomatic that the most difficult public challenges require innovation across many sectors – government, for-profit business, nonprofit organizations, and philanthropists.

In a new column for Project Syndicate, our own Laura D. Tyson argues that we now have a template for such innovation from an unlikely source: the Patient Protection and Affordable Care Act, President Obama’s controversial health care reform.

“Innovation is probably the least discussed aspect of health-care reform,” writes Tyson, in collaboration with Lenny Mendonca, a former director of McKinsey & Co.  But when historians look back 25 years from now, they predict, “we think they will focus on how ‘Obamacare’ encouraged a wave of innovation that gradually tamed the spiraling costs of a dysfunctional system.”

The Affordable Care Act provided myriad new incentives to reduce costs, from reducing costly hospital infections and re-admissions to expanding the use of electronic medical records. More important, the ACA funded pilot projects in cities and states around the country in “accountable care organizations,” “bundled payment” systems and other innovations.

A central goal of these pilot projects has been to shift incentives so that health care providers are rewarded for better outcomes rather than for the number of procedures they perform. Many of the pilot projects aim to provide better coordination of care, especially for patients with numerous chronic problems. Such patients are among the 10% of patients who account for about 64% of health care spending.

These efforts appear to be having an impact. From 1980 to 2010, health care spending grew twice as fast as the economy. But from 2010 through 2013, that spending slowed to roughly the same pace as the U.S. gross domestic product. “Indeed,” write Tyson and Mendonca, “this period was characterized by the slowest growth in real per capita spending on record.”

The ACA, they write, “is an example of how government can promote innovation to address major societal challenges by providing goals, directions, and incentives, rather than dictating solutions.” They cite bold statewide experiments in Arkansas and Oregon, as well as a pioneering local program in Camden, N.J., that is now being widely replicated.

The lesson here is not simply about health care, say Tyson and Mendonca.  The broader point is that the government, working with private business, state and local communities, and nonprofit organizations, can tackle society’s most difficult problems in part by playing a role similar to that of a venture capitalist.

“Health care reform is just one example in which government can deliver what the public wants by setting goals, encouraging creativity, and providing the resources to scale up what works,” they write.

Fair Trade vs. Its Critics: Is Aid Better than Trade?

By Jennifer Walske

A few weeks ago I met with Paul Rice, CEO of Fair Trade USA, and Bruce Wydick, economist and author of a new novel entitled A Taste of Many Mountains. We debated the role of fair trade in improving the lives of rural coffee growers around the world.

Paul Rice and Bruce WydickBruce Wydick and Paul Rice debate the merits of Fair Trade coffee

The U.S. fair-trade movement gained momentum in response to a series of coffee crises. In 1989, the International Coffee Agreement collapsed, resulting in a drop in coffee prices to about 80 cents per pound – the lowest level in decades. Small-time coffee farmers and their families, many of whom were already poor, were thrown into desperate poverty. Prices gradually recovered, only to crash a second time in 2001 to an even more  shocking low of 45 cents per pound. This second crisis was the result of a coffee surplus that had been created when coffee from Vietnam flooded the market. The International Monetary Fund (IMF) had provided financing for Vietnamese growers in the hope of lifting them out of poverty. The result was a surge of Vietnamese coffee that created an even larger poverty crisis among the world’s coffee growers.

During the 2001 crisis, consumers in the U.S. wanted a way to enjoy their daily morning coffee without feeling guilty about perpetuating unfair wages on impoverished farmers. While the Fairtrade Labeling Organization (FLO) served European consumers, there was no U.S. equivalent. Recognizing this, Paul Rice launched Fair Trade USA (originally known as TransFair USA) shortly after earning his MBA in 1996 at Berkeley-Haas. Since its founding in 1998, Fair Trade USA has certified over 1 billion pounds of coffee as well as a wide range of other agricultural products and even some manufactured goods.

Today, fifteen years after the launch of Fair Trade USA, Bruce Wydick’s book raises questions around the movement’s ability to help poor coffee farmers. In the novel, student researchers are tasked with tracking fair trade beans that originate with poor Guatemalan coffee growers. The beans travel through a network of cooperatives and roasters, ultimately ending up in the cups of Bay Area consumers.

The novel’s student researchers confirm that affluent consumers here are willing to pay upwards of fifty cents more for a cup of fair-trade coffee, but they calculate that less than one cent of that premium gets back to farmers. In essence, Wydick’s book argues that a disproportionate share of the profit from fair-trade coffee goes to first-world roasters and retailers rather than the third-world growers and cooperatives. Though the book is fiction, its criticisms are based on empirical research by UC Berkeley economists Alan de Janvry and Elizabeth Sadoulet.

Wydick also contends that fair-trade premiums can be illusory. Like any other commodity, he contends, fair-trade coffee is subject to the forces of supply and demand. If fair-trade coffee fetches a higher price, farmers will produce more of it and create an increase in supply that drives prices back down. Over time, Wydick argues, the inevitable equilibrium between coffee supply and demand will usually eliminate any real premium for fair-trade products. He suggests that Fair Trade-certification is only useful when coffee prices are low; when prices are high, fair-trade farmers lose the incentive to certify.   As a result, Wydick argues that aid is likely to be more effective than trade in helping impoverished farm communities.

Wydick’s critique raises a fundamental question: Which has more social impact, aid or trade?

Rice responds to the criticism with his own market-based argument, contending that fair trade offers farmers a unique opportunity to earn their way out of poverty. He also passionately argues that fair-trade cooperatives, the recipients of fair-trade premiums, are much more likely than individual farmers to make long-term investments in local schools and community services.

If the world indeed has a coffee surplus, says Rice, then fair-trade premiums could eventually reduce the surplus by paying for the education of coffee-growers’ children and allowing them to move beyond coffee-growing. Many fair trade cooperatives invest not only in the farmers’ children, but also the farmers themselves by offering classes in English, computer skills, trade skills, and assistance in completing their high school equivalency.

Rice agrees that it is important for farmers to diversify beyond coffee. To that end, Fair Trade USA is aggressively diversifying its certification program to include other consumer products, from tea and fruit to soccer balls.

I recently returned from visiting two Fair Trade-certified pineapple farms (one organic and one non-organic) located in Cost Rica.

Dennis Gaughen Finca CorsicanaDennis Gaughen, a former student at UC Berkeley, is  General Manager of Finca Corsicana.

Finca Corsicana is an organic pineapple farm. It has a thriving fair-trade cooperative, which has built a community center that offers adult education, an Internet center, and a large basketball court. Once permits are granted from the Costa Rican government, land is being set aside for a nursery school. Notably, the employees of the farm, not the owners of the farm, prioritized these investments. The center serves more than just farm workers, offering the entire local community an array of fee-based services.

Finca corsicanaFinca Corsicana’s Fair Trade community center

Dole owned the second Costa Rican pineapple plantation that I visited. It also has a fair-trade cooperative, with similar plans for a community center. The Dole-affiliated cooperative spent $50,000 on free dental care for all of its members. Even though dental care is free in Costa Rica, there aren’t enough government-paid dentists to meet the population’s needs. A farmer can wait in line all day to see a dentist, missing an entire day of work, and still not get treatment. Many farm workers don’t even try to see a dentist and suffer instead from the daily pain of treatable infections.

Dole allowed dental work to be done on site, and it ensured that workers would not lose pay for the time they spent in the dental chair. The community centers and the enhanced health care are huge strides for both the employees and the companies that employ them.  They were financed in large part by the money from fair-trade price premiums. In addition, Dole and Finca Corsicana deeded land to the cooperatives for their community centers that was worth almost $300,000.

The farmers now see themselves as effective advocates for their own priorities. These developments are also important for the corporations, which are solving social problems in partnership with, rather than in opposition to, their employees.

Whole Foods bananasWhole Foods is the main buyer of Costa Rican Fair Trade-certified pineapples.

Let’s return to the question: Is aid better than trade? Are we better off teaching people to fish – or should we just give them fish? Aid often amounts to giving people fish. Poorly designed aid is like giving a person bait without a fishing pole. In contrast, assistance through fair trade amounts to teaching people to fish. Through cooperatives, farmers can reinvest their fair-trade premiums into their communities and create a better future for their children.

There is a catch, however. As Wydick warned, the supply of fair-trade goods often exceeds consumer demand.  As a result, farmers often sell fair-trade coffee as uncertified coffee, without any premium, simply to get it sold. To follow through on the analogy of fishing, people are being taught to fish but are catching more fish than anybody wants to eat or buy.

As consumers and donors, this is where we can play a role. Fair Trade USA, unlike OPEC, does not control the production of coffee worldwide. Today, fair-trade coffee still accounts for only about 6% of all coffee consumed within the U.S. But as consumers, we can and should demand that a higher percentage of our products come from sources that are Fair Trade-certified and that a higher amount of the profit from these goods gets back to farmers.

But I also propose that we combine trade with aid by finding creative ways to give aid directly to fair-trade cooperatives. This aid should be for initiatives that the cooperatives themselves have identified as top priorities. After all, the members of those cooperatives are more likely than distant aid officials to know their communities’ most urgent needs.

Aid in isolation is not the solution, but trade has shortcomings as well. Changes in trade practices and supply chains don’t happen overnight. For sure, consumer engagement and corporate education can be slow. But aid can also be problematic, especially when its not managed by the communities most in need. Local communities must be encouraged to identify their biggest problems and propose their own solutions if those solutions are to be successful in the long run.

Do I still plan to buy Fair Trade-certified products? Yes, absolutely. We need more of them, not fewer. So this holiday season I am going to continue to sip my fair-trade coffee and eat my fair-trade bananas. And as a result of my trip, I am also going to add delicious Costa Rican Fair Trade pineapple to my shopping cart.

Dr. Jennifer Walske is a Social Impact Fellow at Haas School of Business, as well as a Program Director and Assistant Professor at the University of San Francisco. She sits on the advisory boards of Fair Trade USA, the Global Social Venture Competition, Haas Impact Investing Network, and numerous other organizations.

Using Joint Liability to Spur Sustainable Farming

Christopher Tang

Many kind souls have tried to train impoverished farmers in developing countries to become more productive, but the obstacles are formidable.

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Inadequate and sometimes non-existent infrastructure is one major challenge. It can be very costly and time-consuming for companies, governments, or non-profits to send trainers to remote villages – especially when the villages often differ on everything from soil conditions to culture and language.

To deal with that, many aid organizations offer “train the trainer” programs. They train a select group of local farmers on techniques to increase yields, reduce costs and improve sustainability. Those farmers then train others in their villages and cooperatives.

The Rainforest Alliance, for example, offers a training program to improve both productivity and environmental sustainability by making better use of scarce natural resources. Thanks to higher productivity and better long-term stewardship, farmers who comply with the Rainforest Alliance’s Sustainable Agriculture Standard tend to earn more than those who do not.

Rainforest graphs                                 Source: Rainforest Alliance

But “training the trainer” only facilitates learning. How about the doing? How can one ensure that the farmers who seek the Rainforest certification actually follow through in practice?

Monitoring and auditing are costly, because small farmers are often on hard-to-reach plots sprawled across a wide territory. Rainforest Alliance developed a novel approach that calls for group certification process with joint liability.

The group trains a select number of local farmers for training, and those farmers are then responsible to training others in their cooperative. In each of the two subsequent years, Rainforest Alliance will audit the farmers in each cooperative to verify that the standards are being fulfilled and to identify corrective actions that may be needed.

The key to compliance lies in the joint liability – the joint responsibility – of all farmers in a cooperative to adhere to the Sustainable Agriculture Standard. If the percentage of complying farmers falls below a pre-specified threshold, the entire cooperative will lose its certification.

Joint liability has been successful in other anti-poverty contexts. Grameen Bank, the pioneer in micro-lending, has lent money to over one million groups of poor people who were held jointly responsible for the loans.

Each group member is responsible for the repayment of others. If individual borrowers fall behind on repayments, lending to the entire group can stop. That produces peer pressure on all members to make good on their loans, and it is a major reason that Grameen Bank has recovered 98% of its loans.

When people receive reward and punishment as a group, they have a strong incentive to monitor each other for compliance. Joint liability becomes a form of self-regulation.

Indeed, the basic idea proved effective more than 2000 years ago: During the Qin dynasty in China, from 221 BC to 207 BC, the emperor used collective punishment to unite China and enforce his laws.

White House Enlists Berkeley-Haas for Action Plan on Responsible Business

The White House has selected the Berkeley-Haas Center for Responsible Business to host one of four national dialogue sessions to help develop a National Action Plan for responsible practices by American corporations operating in other nations.

“We are humbled to have been asked by the White House to convene this important event,” said Robert Strand, Executive Director of the CRB. “The CRB has a long legacy for encouraging critical dialogue about the topics associated with responsible business.”

A bit of background: the US government has for decades prosecuted American companies for certain kinds of illegal activity in foreign countries. Under the Foreign Corrupt Practices Act, the Justice Department prosecutes American companies and executives for bribing foreign officials.

In September, President Obama announced a broader effort: a National Action Plan to provide incentives and pressure to spur better behavior on a broader array of social-impact issues. The key principles are laid down in the UN Guiding Principles on Business and Human Rights and the Organization for Economic Cooperation and Development’s Guidelines for Multinational Enterprises.

Anti-corruption efforts are high on the agenda, but so are other business practices that affect human rights, workplace safety and environmental sustainability.

Denmark, Finland, the United Kingdom and the Netherlands have already adopted or at least drafted their own National Action Plans. The International Corporate Accountability Roundtable, which has been pushing the US government to adopt exactly this kind of national action plan, recently teamed up with Denmark’s Institute of Human Rights and published a “tool kit” for such efforts.

On Nov. 20, the White House announced that it will organize a series of open “dialogues” with stakeholders from all sides to provide ideas on both the scope and process of a national action plan for the United States.

The first conference will be hosted on Dec. 15 by New York University’s Stern Center for Business and Human Rights and the United States Council for International Business. The second conference will be hosted at Berkeley-Haas by the Center for Responsible Business. A third conference will be hosted by the University of Oklahoma School of Law. The final conference will be co-hosted in Washington, D.C., by the International Corporate Accountability Roundtable and the Global Business Initiative on Human Rights.

Although there is widespread support for responsible business practices and greater transparency, there is bound to be disagreement about the scope of a National Action Plan and the government’s role in carrying it out. To cite just one recent example, American and European corporations took sharply different approaches in setting up a system in Bangladesh to prevent repeats of the 2013 textile factory collapse that killed some 1,100 workers.

The purpose of the four conferences is to spur robust discussions by stakeholders from business, labor, and civil society. In addition, however, the White House is soliciting written comments from people and organizations on all sides. The deadline for the first round of submissions is Jan. 15, and commenters can send them to NAP-RBC@state.gov.

Is Corporate Social Responsibility a Vanity Project?

It’s been more than 40 years since Milton Friedman famously declared that “the only social responsibility of corporations is to make money,” and business experts still debate the link between doing good and doing well.

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At the Institute, most of us think the empirical evidence is strong that corporate social responsibility (CSR) correlates closely with maximizing shareholder returns.

And as Laura Tyson pointed out last year, there is a strong logic behind this. If corporations ignore the social and environmental context in which they operate, they run all kinds of bottom-line risks: reputational damage and loss of brand value; falling sales; lower worker productivity; regulatory backlash; higher costs tied to climate change.

But last week, the Center for Responsible Business awarded the 2014 Moskowitz Prize to a paper that examines a largely neglected underlying issue: are CSR programs likely to be vanity projects that serve the self-interest of individual executives at the expense of shareholders? Are executives squandering shareholder resources to promote their own glory or other private agendas?

In the language of management theory, some critics have argued that CSR is a sign of “agency problems” – that managers are putting their individual interests above those of shareholders. If that’s true, CSR is at best a waste of resources and at worst an indicator of more pervasive self-dealing.

Happily, the new paper concludes that critics are wrong.  Entitled “Socially Responsible Firms,” the paper comes from Allen Ferrell of Harvard Law School and Hao Liang and Luc Renneboog of Tilburg University in the Netherlands.

The researchers analyzed data from thousands of companies across 59 countries, and mapped levels of CSR activity against other indicators of good or bad corporate governance.

In a nutshell, the researchers find that the level of CSR activity correlate very closely with a host of other indicators of good governance aimed at maximizing shareholder returns.
These indicators include high capital expenditure rates, high cash holdings and high free cash flows, low dividend payout ratios, and low leverage.

Companies with very high levels of free cash flow, for example, have long been associated with diversions of corporate capital to private interests. The theory is that companies with an abundance of free cash flow come under less scrutiny from investors and create opportunities for managers to divert money for their own purposes. By contrast, managers are on a much tighter lease at companies that pay out a high share of profits as dividends to shareholders.

Management theory also holds that weak pay-for-performance incentives can lead to a misalignment between the interests of management and shareholders. Executives with smaller stake in the company’s growth are more likely to divert money to projects that benefit them personally than projects that benefit the company as a whole.

The researchers found that higher CSR performance was closely tied to companies with tighter cash and higher pay-for-performance – in other words, companies that seem more geared to maximizing shareholder returns. On top of that, firms operating in countries with strong shareholder-protection laws also tended to have high CSR ratings.

“Our empirical results…suggest that good governance causes high CSR, and that a firm’s CSR practice is consistent with shareholder wealth maximization,’’ the authors concluded. Far from being the result of self-dealing, entrenched management, corporate social responsibility “can actually preserve a core value of capitalism – generating more returns for investors.”

Laura Tyson: Paying for Productivity

When the chair of the Federal Reserve Board gives a major speech about the steady rise of inequality in the United States, as Janet Yellen did last month, it may be time to think about ways to respond.

Laura Tyson, in a recent column for Project Syndicate, suggests a strategy that private business could consider on its own: an expansion of profit-sharing.

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As Tyson notes, one of the most defining and disheartening trends in the United States over the 40 years has been real-wage stagnation for most workers.  The average family income for the bottom 90 percent of households has been flat since 1980, while incomes have climbed substantially for those in the top 10 percent and top 1 percent.

Worker productivity isn’t the problem. Productivity has been climbing at a healthy clip throughout this period. What’s new is that wage growth has fallen far behind.

Standard economic theory holds that wages and productivity should climb roughly in line with each other, and that did happen during the first 30 years after World War II (which included stellar periods of growth). But as this chart from the Economic Policy Institute shows, we have  experienced a huge de-coupling since then:

 

Gap between productivity and wages

 

 

 

 

 

 

A growing number of influential economists warn that this stagnation will mean anemic growth and long-term “secular stagnation.”  Two of the nation’s best-known gurus on business competitiveness – Michael Porter and Jan Rivkin of Harvard Business School – recently warned that business itself is at risk from “an inadequate workforce, a population of depleted consumers, and large blocs of anti-business voters.”

Tyson argues that expanded profit-sharing could be good for all sides. A long series of studies over the years has documented a strong positive link between profit-sharing and productivity. Alan Blinder edited a collection of studies on the issue by many economists, including Tyson, some 20 years ago. A new book, Shared Capitalism at Work by Douglas Kruse, Richard Freeman, and Joseph Blasi, confirmed that conclusion with more recent evidence.

Profit-sharing has grown steadily in various forms, from grants of stock options and restricted stock to profit-based bonuses.  But it has been awarded to only a small slice of executives and key employees.

Wider profit-sharing offers both public and private benefits. It would raise real incomes for a broad base of middle-income families, which would likely boost consumer spending and prevent a hollowing-out of the economy. It would not increase the size of government, and there are strong reasons to think that it would increase profitability by having employees who are more engaged and committed to their companies’ long-term prospects.

America’s rising productivity is a signature strength of its economy.  Tyson suggests that it may be time to share more of the fruits of that productivity with those who helped create it.