Building the Responsible Enterprise: Where Vision and Values Add Value

By Sandra Waddock and Andreas Rasche

Building the Responsible Enterprise provides students and practitioners with a practical, yet academically rooted, introduction to the state-of-the-art in sustainability and corporate social responsibility.

The book consists of four parts, highlighting different aspects of corporate responsibility. Part I discusses the context in which corporate responsibility occurs. Part II looks at three critical issues: the development of vision at the individual and organizational levels, the integration of values into the responsible enterprise, and the ways that these building blocks create added value for a firm. Part III highlights the actual management practices that enable enterprises to achieve excellence, focusing on the roles that stakeholder relationships play in improving performance. The book concludes with a conversation about responsible management in the global village, examining the emerging infrastructure in which enterprise finds itself today. Throughout the text, cases exemplify key concepts and highlight companies that are guiding us into tomorrow's business environment.

• Language: English
• Publisher: Stanford Business Books
• Release date: Jun 13, 2012
• ISBN: 9780804783873

Sandra Waddock

Dr. Sandra Waddock, Galligan Chair of Strategy, Carroll School Scholar of Corporate Responsibility, and Professor of Management at Boston College’s Carroll School of Management, has published about 180 papers and chapters and 15 books. Her books include Building the Responsible Enterprise with Andreas Rasche, The Difference Makers, Intellectual Shamans, and Transforming towards Life-Centered Economies.

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© 2012 by the Board of Trustees of the Leland Stanford Junior University.

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Printed in the United States of America on acid-free, archival-quality paper

Library of Congress Cataloging-in-Publication Data

Waddock, Sandra A., author.

Building the responsible enterprise: where vision and values add value / Sandra Waddock and Andreas Rasche.

pages cm

Includes bibliographical references and index.

ISBN 978-0-8047-8194-7 (cloth : alk. paper)

ISBN 978-0-8047-8195-4 (pbk : alk. paper)

ISBN 978-0-8047-8387-3 (e-book)

1. Social responsibility of business. 2. Industrial management—Social aspects. 3. Industrial management—Environmental aspects.

I. Rasche, Andreas, author. II. Title.

HD60.W323 2012

658.4'08—dc23

2011043524

BUILDING THE RESPONSIBLE

ENTERPRISE

Where Vision and Values Add Value

SANDRA WADDOCK AND

ANDREAS RASCHE

STANFORD BUSINESS BOOKS

An Imprint of Stanford University Press

Stanford, California

CONTENTS

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Title Page

Copyright

Preface

Acknowledgments

PART I

A CONTEXT FOR RESPONSIBLE ENTERPRISE

Chapter 1

Responsible Enterprise: A Systems Perspective

Chapter 2

In Search of Balance: Business, Politics, Civil Society, and Nature

PART II

DEVELOPING RESPONSIBLE ENTERPRISE

Chapter 3

The Role of Personal and Organizational Vision

Chapter 4

Values in Management Practice: Operating with Integrity

Chapter 5

Value Added: The Impact of Vision and Values

PART III

MANAGING RESPONSIBLE ENTERPRISE

Chapter 6

Stakeholders: The Relationship Key

Chapter 7

Managing for Responsibility

Chapter 8

Assessing Responsible Enterprise

Chapter 9

Sustainability and the Global Village

Chapter 10

Responsibility Initiatives and Guidance Documents

PART IV

REINVENTING CSR: CORPORATE SUSTAINABILITY AND RESPONSIBILITY

Chapter 11

Scanning the Future: Finding Pattern in Chaos

Chapter 12

Value Added for the Global Future

Notes

Index

PREFACE

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This book aims to provide practitioners, academics, and students with a hands-on, yet theoretically based, introduction to corporate responsibility and responsible enterprise. Since the mid-1990s there has been a virtual explosion of interest in the issue of responsible enterprise, often labeled corporate responsibility. We adopt the term responsible enterprise to reflect the reality that responsibility practices go far beyond large multinational corporations; they are being implemented in small and medium-sized business enterprises, as well as in other newly emerging types of enterprises. Increasing attention to issues related to climate change and sustainability has only heightened the understanding of business’s interdependence with the rest of society, its stakeholders, and the natural environment. In light of these major challenges, the goal of this book is to help those leading and studying responsible companies to understand the complex dilemmas that leaders face and the multiple perspectives embedded in every decision. The book also seeks to build awareness of the implications of managerial decisions for everyone they affect—the stakeholders and the natural environment with its manifold living beings.

In many respects the book reaches beyond the traditional literature on responsible enterprise. In discussing firms’ social and environmental responsibilities, we rely on insights from other fields within the management domain (e.g., strategic management, human resource management, and organizational behavior) and on other academic disciplines (e.g., political science, philosophy, psychology, and sociology). The resulting reflections paint a picture of corporate responsibility that shows the field’s embeddedness in other discourses, demonstrates its breadth, and, we hope, suggests its depth.

This book adopts a more personal tone than many other books on the subject. We do not want to provide yet another introduction to corporate responsibility/responsible enterprise without paying sufficient attention to the personal values and visions underlying the management of social and environmental issues. For us, managing a firm’s responsibility is as much a personal journey as it is a management task. We hope that the discussions in this book reflect these more personal aspects and inspire readers to strive for change in companies and in themselves.

Let us be clear about two things. First, we do not believe that companies that start to address corporate responsibility will turn into paragons of virtue. Like human beings, every company makes mistakes. But responsible firms must be willing to deal with these mistakes and learn from them. Second, although we highlight the business case for responsible enterprise, we do not think that all corporate responsibility efforts will automatically create win-win situations. The existence of a business case for corporate responsibility depends a lot on what issues are addressed by whom and in what context.

Finally, we hope that readers will have as much fun reading the book as we had writing it!

Sandra Waddock

Andreas Rasche

Boston and Coventry

February 2012

ACKNOWLEDGMENTS

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From Sandra Waddock: Intellectual debts are difficult to pay. To all the authors cited in this book and so many more in the field, I thank you for your ideas and vision and hope your ideas have inspired mine in ways that you find acceptable. There are a few people who deserve particular mention. I will be forever grateful to Jim Post of Boston University, mentor and friend for so many years, for his ideas and inspiration. Also to Brad Googins, former executive director of the Boston College Center for Corporate Citizenship, for his thought leadership and for providing ways for me to learn firsthand what responsible enterprise is all about; and to Ed Freeman for his friendship and all of his work on stakeholder theory. I also want to thank Malcolm McIntosh, co-author with me of SEE Change: Making the Transition to a Sustainable Enterprise Economy, for his intellectual courage and ability to speak truth to power, and to all the other difference makers and intellectual shamans whose lives and work are so inspiring. For those who have provided intellectual and other support over the years, particularly Dawn Elm, Jeanne Liedtka, Larry Lad, Judy Clair, and so many others, I am grateful.

The Boston area music community also deserves thanks for providing an outlet other than work—Summer Acoustic Music Week (SAMW), Ellen Schmidt and her open mikes and all the other open mike hosts, the Folk Song Society of Greater Boston, the Mystic Chorale (especially founder and director Nick Page), and the Boston Minstrels. To my good friends Priscilla Osborne, Pennie Sibley, Margaret Skinner, Tish (Schilling) Miller, Harriet Hart, and too many others to mention, thank you. For Ben Wiegner, my son, who inspires with his own very different passions, I am most grateful. Not least, in fact perhaps most, to Alan Rubin, who is steadfast through it all, my love and gratitude.

From Andreas Rasche: Many people have influenced my thinking about responsible enterprise over the years. Although any list of people would be incomplete, a few people deserve to be singled out. I am very grateful for the many insightful discussions I have had with my friend and colleague Dirk Ulrich Gilbert. I also express my gratitude to Colin Crouch at the University of Warwick (who taught me that responsible enterprise is much more about economic governance than I ever thought), Günther Ortmann at Helmut-Schmidt-University Hamburg (who helped me to understand the limits of thinking about responsible enterprise), and Ulrich Grimm at EBS Business School, Germany (who tolerated my interest in different academic discourses and thus allowed me to join this debate in the first place). I am particularly grateful to Sandra Waddock for choosing to collaborate with me on this project and for being a wonderful person to work with.

I am also much obliged to my family and friends for their enduring support, tolerance, patience, and most of all, true friendship. Last but not least, I am deeply grateful to Stephanie Rasche, my wife, who is a constant source of inspiration and love.

Finally, we both want to thank Margo Beth Fleming, our editor at Stanford University Press, whose support and encouragement enabled us to tackle this book at all, and Stanford University Press itself for publishing this book.

For all who would be responsible. . .

For all who make the world a better place . . .

For all who care. . .

We are grateful.

Part I

A CONTEXT FOR RESPONSIBLE ENTERPRISE

1

RESPONSIBLE ENTERPRISE

A Systems Perspective

We have to choose between a global market driven only by calculations of short-term profit, and one which has a human face. Between a world which condemns a quarter of the human race to starvation and squalor, and one which offers everyone at least a chance of prosperity, in a healthy environment. Between a selfish free-for-all in which we ignore the fate of the losers, and a culture in which the strong and successful accept their responsibilities, showing global vision and leadership.

Kofi Annan, former Secretary-General of the United Nations, in a speech at the World Economic Forum, 1999¹

CORPORATE RESPONSIBILITY FOR SUSTAINABLE ENTERPRISE

The speech by former United Nations Secretary-General Kofi Annan quoted in the epigraph above sparked a firestorm of interest among executives in attendance. Only one year later the United Nations launched the UN Global Compact as a formal organization. By its tenth anniversary in 2010, the UN Global Compact was by far the world’s largest corporate responsibility initiative, with over 8,600 signatories, 6,200 of which were businesses, including many transnational corporations. Annan’s words highlight an important and often forgotten reality: business is integrally connected to both the social and ecological contexts in which it operates.

With his statement, Annan signaled new recognition of an important shift in the long-term relationships that businesses can expect to have with their many constituencies—their stakeholders—and with how they treat the natural environment.² As businesses have grown larger and more powerful, their attendant duty to be responsible wherever they operate has also grown. Indeed, some argue that the rise of the very term corporate responsibility since the late 1990s came about in part because some companies in the process of globalization began to assume responsibilities formerly assigned solely to governments.³ Today, expectations that businesses will play constructive and responsible roles in creating an equitable and sustainable society are further enhanced by worries about global climate change, the economic meltdown of 2008 and its ensuing social problems, and the continuing gap between rich and poor, North and South.

Consider the following: during the first ten years of the 21st century, the world was faced with a series of major business scandals and ethical abuses, including the collapse of Enron, a global financial crisis resulting from an increasingly dominant financial services industry that acted more like a gambling casino than your neighborhood banker, a collapsing housing market resulting from deceptive and problematic mortgage lending practices, and the recognition that climate change and a sustainability crisis were no longer impending but in fact present.⁴ The gap between rich and poor globally grew wider, in some places resulting in revolution, and in others leaving billions of people to subsist in grinding poverty. Ecologists note that all major ecological systems are in decline—with overfishing, erosion of topsoil, desertification, clear-cutting of forests for timber, burning of rainforests for grazing and cropland, fertilizer polluting rivers, streams, and lakes, and species extinction at an unprecedented rate being only a few of the many ecological problems facing the planet.

Despite the Millennium Development Goals (MDGs) proffered by the United Nations with the intent of reducing poverty, increasing education, and enhancing sustainability in the world, nearly 3 billion of the 7 billion people in the world still live on less than $2.50 a day, 1.1 billion do not have clean water to drink or cook with, and 2.4 billion people have no sanitation facilities. Trust in business, according to many surveys, is at an all-time low—with other institutions not faring much better. The world’s public authorities seem unable to move effectively to deal with the sustainability and climate change crises. Businesses are oriented toward short-term maximization of shareholder wealth. Free-market ideology has taken its toll on many nations and communities, which have lost jobs and the capacity to be self-sustaining as they tried to enter the global economy.⁵ The litany could go on, but is it any wonder that some people doubt that it is even possible for business to be responsible in this context?

Calls for greater business and corporate responsibility—that is, more responsible enterprise: greater accountability, responsibility, transparency, and sustainability—from all types of enterprise are commonplace. Many companies have, in fact, developed significant initiatives around corporate social responsibility, which we define as explicit pro-social initiatives on the part of companies. Others have developed major sustainability initiatives or characterize their efforts as corporate responsibility, implying that they are attempting to be accountable, responsible, transparent, and sustainable in their business models and practices. We will say more about these ideas later, but the point is that there is a great deal of activity around responsible enterprise within companies—but still not enough to restore the public trust in business enterprise. Still not enough to ensure that there will be sufficient change to the system to guarantee necessary husbanding of planetary resources, care with social and human resources, or safeguarding of financial resources.

With this book we offer a roadmap for those who wish to follow the path of responsible and sustainable enterprise; we provide frameworks and arguments for why doing so is not only good business but an imperative for all of us living on earth today. We are, in the end, all in this together.

DEFINING RESPONSIBLE ENTERPRISE

Responsible enterprise is an integral part of the whole corporation as it exists in whole communities and whole societies. Companies are increasingly being held accountable for respecting society and social rights (e.g., by not polluting or otherwise contributing to deteriorating environmental conditions, including global warming), for preserving individual or civil rights (e.g., by providing safe working conditions), and for respecting political rights (e.g., by not operating in countries with governments that do not uphold basic political and individual rights),⁶ among many other responsibilities.

The embeddedness of corporations in societies—that is, their existence as socially constructed holons⁷ in economic, political, societal, and ecological contexts—means that careful attention needs to be given to how they behave. Sustainability, not just of the company, but also of the earth’s capacity to support human life, depends on a systemic understanding of corporations in society, which we develop throughout this book.

If we conceive of companies in terms of their relationships to stakeholders and the natural environment, then we can define responsible enterprise as follows:

Responsible enterprise means that companies live up to clear constructive visions and core values consistent with those of the broader societies within which they operate, respect the natural environment, and treat well the entire range of stakeholders who risk capital in, have an interest in, or are linked to the firm through primary and secondary impacts. They operationalize their corporate responsibilities in all of their strategies and business practices by developing respectful, mutually beneficial relationships with stakeholders and by working to maximize sustainability of the natural environment. They are responsible, transparent, and accountable for their impacts.

Responsible enterprise by this definition involves far more than performing the discretionary tasks and duties associated with philanthropy, volunteerism, community relations, and otherwise doing social good, which some people think is sufficient⁸ and which constitutes corporate social responsibility.⁹ This broad understanding of responsible enterprise means paying attention to how fundamental responsibilities—some of which are those traditionally assumed by governments, such as labor and human rights, environmental sustainability, and anti-corruption measures—are being met in all of the company’s strategies and operating practices, as well as to the outcomes and implications of corporate activities. Responsible enterprise means developing a lived set of policies, practices, and programs that help the company achieve its vision and values.

Adopting such an integrative perspective on responsible enterprise implies not overemphasizing the role of (often isolated) corporate responsibility or corporate citizenship departments, executives, and reports. Real responsible enterprise starts where these measures end. Marc Gunther has made exactly this point by arguing that the traditional focus on the corporate responsibility infrastructure separates a firm’s impact on the world from its core business activities.¹⁰ We couldn’t agree more! Our understanding of responsible enterprise highlights its embeddedness in the day-to-day practices of all people working for or with a firm. Isolating corporate responsibility may in fact imply also isolating its impacts.

One significant challenge, then, is to stop thinking of responsible enterprise as something that can be fixed quickly by adopting the right measures (which are usually the same as those adopted by everyone else). This challenge leads us to highlight two significant propositions underlying this book: (1) responsible enterprise is about inspired leadership and living espoused values in a company; and (2) responsible enterprise requires systems thinking—that is, the explicit recognition that businesses are shaped by and influence the larger social and ecological systems in which they operate.

THE CURRENT STATE OF CORPORATE RESPONSIBILITY: DO COMPANIES INTEGRATE?

Each year the UN Global Compact conducts an implementation survey of a subset of its participants throughout the world.¹¹ The survey is one of the largest and most comprehensive studies of corporate responsibility practices. The 2010 survey compiles more than 1,200 responses from 103 countries. It paints a global picture of corporate responsibility, including the voices of small and medium-sized enterprises (SMEs). The survey attempts to provide an overview of companies’ efforts to integrate corporate responsibility into their everyday business activities, with particular attention to activities related to human rights, labor standards, environmental protection, and anti-corruption.

Although the survey reveals that companies perform at very different levels (mostly because of their large geographic diversity), it also shows that corporate responsibility practices are increasingly embedded into value and supply chain activities, particularly those related to the management of environmental issues and labor standards. For instance, almost half of all companies have developed management systems to monitor and evaluate performance in these two areas. Companies seem to have realized that just having policies or codes of conduct is of little consequence if these statements are not integrated into existing business processes. The Global Compact’s survey, however, also shows that firms still have a lot to learn about corporate responsibility—in particular, human rights and anti-corruption issues are not yet adequately integrated into business practices. The survey also shows that company size has a significant effect on performance. While nearly 50 percent of larger companies have institutional frameworks for industrial relations in place, only 25 percent of SMEs have such frameworks. This insight also points to the fact that SMEs need more support and guidance when it comes to addressing social and environmental issues in their specific contexts. The study also finds that publicly traded companies perform more strongly in some areas (such as anti-corruption), possibly owing to government regulation of their operations.

The Global Compact survey shows that an isolated, project-based view of corporate responsibility is gradually being replaced by an integrated understanding. It is clear that firms are looking for more than philanthropic projects managed by corporate headquarters. The survey reports that 79 percent of firms are trying to spread their corporate responsibility practices to subsidiaries in order to connect companywide policies to local issues and problems.

The decision to be a leader of responsible enterprise is, of course, voluntary; however, companies always bear responsibility for the ways in which they treat their stakeholders and nature—and are judged on their impacts—whether or not they proactively or interactively assume the role of responsible business leadership. Further, the imperatives of ecological sustainability, which have become apparent in recent years, mean that few companies or individuals today can afford to ignore the systemic consequences of a production system that is not focused on both ecological sustainability and responsible practice. Responsible enterprise has become institutionalized in the sense that it is perceived by many as a broadly accepted part of doing business driven by pressures from consumers, civil society organizations, investors, governments, and of course the self-interest of corporations.¹²

Given the preceding definition of responsible enterprise, we begin with a proposition: The core purpose of the corporation includes but goes far beyond generating shareholder wealth. Indeed, wealth and profits are simply important by-products of the firm’s efforts to create a product or service for customers that adds enough value that customers are willing to pay for it. Value-added goods and services are produced through the efforts of employees, managers, suppliers, and allies, using a wide range of forms of capital. Management thinker Charles Handy puts the issue straightforwardly:

To turn shareholders’ needs into a purpose is to be guilty of a logical confusion, to mistake a necessary condition for a sufficient one. We need to eat to live, food is a necessary condition of life. But if we lived mainly to eat, making food a sufficient or sole purpose of life, we would become gross. The purpose of a business, in other words, is not to make a profit, full stop. It is to make a profit so that the business can do something more or better. That something becomes the real justification for the business.¹³

Further, capital investments in businesses go way beyond those made by shareholders. Capital does, of course, include the important financial resources supplied by owners and shareholders. Equally important, capital encompasses the intellectual and human capital provided by employees, the trust and loyalty of customers that products or services will meet expectations and add value (for which they will pay), and various forms of social capital. Further, capital includes the infrastructure and social relations supplied by the communities and other levels of government in locations where the company has facilities. Capital encompasses the natural resources supplied by the ecological environment that go into the production and delivery of goods and services. It includes interdependent relationships developed among its business partners, suppliers, and distributors, and it exists in the social contract written or understood by a range of local, state, and national governments, which provide the social—and legal—contract and necessary physical infrastructure on which the firm’s existence is premised. All of these capitals are supplied to the firm by stakeholders. In this sense, we understand responsible enterprise as the task of developing and operationalizing positive stakeholder relationships.

We differentiate responsible enterprise from corporate citizenship. Some scholars have used the term corporate citizenship to describe the discretionary activities that firms are undertaking to be perceived as good citizens in their society.¹⁴ In this sense, corporate citizenship would be similar to the traditional understanding of corporate social responsibility as charitable giving and philanthropy. Other scholars have used the term corporate citizenship to describe the increasing political role of corporations.¹⁵ Here, citizenship implies that companies can in some cases act like governments and influence the rights of people (particularly when governments are not willing or able to do so). The latter understanding of corporate citizenship often analyzes similar issues as responsible enterprise, however from a different (i.e., rights-based) perspective.

RESPONSIBLE ENTERPRISE AND GLOBALIZATION

The debate on corporate responsibility and responsible enterprise gained momentum as actors and problems became more globally interconnected. Today, the question Why is there a need for responsible enterprise? is often answered with reference to the intensified social and economic relations among actors in different geographic locations.¹⁶ Globalization has many facets, although the increase in cross-border trade and investment (economic dimension) and the related liberalization of markets through the policies of intergovernmental organizations and political agreements are most frequently highlighted. Globalization also relates to the standardization of everyday life experiences throughout the world (e.g., with the Internet and social media) and the rise of mass consumption of largely standardized goods and services.¹⁷

The dominance of multinational corporations in the world has created a good deal of controversy about globalization and its impacts on civil society. One important critique of globalization (specifically, corporate globalization) identifies several problematic aspects for many nations, particularly those that are still developing, which are listed in Table 1.1. Pointing out that modern globalization is not inevitable, but rather a system designed by human beings, the nineteen authors of the critique note that the global system promotes free trade and consumerism over other societal values, including protecting the citizens of one’s own country, in the belief that benefits will ultimately trickle down to the poor. Promoted by the Bretton Woods institutions (the International Monetary Fund, the World Trade Organization, and the World Bank), free trade is seen in this view to benefit largely the already-rich and corporations, leaving behind the poor as well as developing nations.¹⁸

Proponents of globalization make many predictions about the positive impacts that globalization will have on developing nations, among them poverty reduction, job creation, more foreign direct investment, and reduced inequalities.¹⁹ Some analysts, however, suggest that these predictions do not necessarily hold in all cases, because globalization sometimes increases income inequality and decreases employment in developing nations. Too frequently companies aggressively seek out low-wage countries, leaving behind facilities in nations where wages have risen, creating what some observers call a race to the bottom. This race to the bottom leaves the people in nations that have been left behind with lower social cohesion, fewer jobs, less political capacity, and fewer technological opportunities.

TABLE 1.1 Main Characteristics of the Current Globalization Model

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SOURCE: John Cavanagh et al., Alternatives to Economic Globalization: A Better World Is Possible (San Francisco: Berrett-Koehler, 2002).

Over time, the globalization of society has affected many of the problems discussed in the context of responsible enterprise. For instance, the globalization of production and the related outsourcing of labor-intensive work to low-wage countries have significantly affected the discussion around working conditions. Some of the issues addressed within the sphere of responsible enterprise can even be characterized as genuinely global issues (i.e., issues that by their very nature affect the whole planet). Climate change, for instance, is a global problem because dealing with it effectively requires coordinated action across the globe. Although the increase of carbon dioxide in the atmosphere is largely the result of economic activities in a few countries (most of them in the global North), the consequences of a changing climate cannot be geographically isolated and are more likely to harm developing countries (e.g., through droughts and resulting decreases in agricultural productivity).

The increasingly borderless operations of corporations also challenge the underlying dynamics of regulation. Neither international organizations (whose regulations mostly reflect the lowest common denominator) nor nation-states (whose jurisdiction remains territorially bound) can adequately address global problems. Since a legally enforceable international regulatory framework for social and environmental problems remains a vision for the future, a variety of voluntary responsible enterprise initiatives have formed with the goal of regulating cross-border economic activities. The Forest Stewardship Council (addressing global deforestation) and Social Accountability 8000 (addressing labor conditions at supply factories), for example, have allowed corporations to voluntarily accept responsibility where nation-state regulation is largely absent and/or weakly enforced. Such privatized governance fundamentally redefines the role of business in the global economy, as it actively involves corporations and civil society organizations in the regulation of important social and environmental domains.²⁰

One consequence of the rise of privatized governance is that it challenges the traditional division of labor between the political and economic spheres. Corporations are not just following the rules set by governments, but have turned into political actors themselves, going well beyond their traditional role as lobbyist for their own interests. Corporations have assumed responsibility for tasks that were once regarded as the domain of governments by contributing to public goods such as health and education programs, both in the developing and the developed world. Needless to say, the increasing political role of corporations raises the question of legitimacy. While most governments are democratically elected, corporations do not possess a political mandate but nevertheless influence the lives of people through their activities. For this reason, corporations must be held accountable for their judgments, actions, and omissions—a topic we will return to in Chapter 7.

THE FOREST STEWARDSHIP COUNCIL: AN EXAMPLE OF PRIVATIZED GOVERNANCE

Deforestation is one of the world’s most pressing ecological problems. Although rates of deforestation differ from region to region, the nongovernmental organization (NGO) Conservation International reported in 2011 that the ten most endangered regions have already lost more than 90 percent of their original habitat.²¹ The overwhelming driver of deforestation is the quest for agricultural land, which in turn is influenced by population pressure and weak economic and social conditions. The consequences of deforestation are both environmental and economic: the loss of trees that eliminate CO2 from the atmosphere through photosynthesis may exacerbate global warming, and deforested land reduces agricultural productivity.

When governments were unable to commit to a binding international agreement regulating deforestation after the UN Conference on Environment and Development in Rio de Janeiro in 1992, businesses and civil society organizations responded by establishing the Forest Stewardship Council (FSC). According to Philipp Pattberg, the FSC is a system of rules through which sustainable forest practices and products emanating from these practices are certified by accredited, independent organizations and made recognizable to consumers in the marketplace.²² Currently, more than 143,299,840 hectares of land in seventy-nine countries are certified under the rules set by the FSC. To ensure that the rules of the global initiative are sufficiently adapted to local circumstances, the FSC has set up so-called National Initiatives in more than fifty countries. These initiatives anchor the FSC in local contexts by promoting its principles and developing national standards for certification.

The FSC’s governance structure reflects its multistakeholder and global nature. Participants are divided into three chambers representing business, social, and environmental interests. Each chamber has equal voting power, while within each chamber no more than 50 percent of participants can represent the global North or South. This tripartite governance structure avoids capture of the initiative by any particular group of actors and strengthens its perceived legitimacy. A nine-member board of directors is elected from the three chambers for a three-year term.

The FSC is an important example of how corporate responsibility is increasingly managed through privatized governance. Although voluntary initiatives such as the FSC cannot substitute for effective regulation by governments or stronger intergovernmental agreements, they offer practical solutions to pressing global problems. It remains to be seen whether privatized governance can have large-scale impact. Currently, the FSC certifies only a small portion of the 3.9 billion hectares of forests covering the earth.

RESPONSIBLE ENTERPRISE AS AN EXAMPLE OF SYSTEMS THINKING

Throughout this book we suggest that responsible enterprise should be approached from a systemic perspective, meaning that the different impacts of business activities should not be evaluated in isolation from each other. Businesses, as much as human beings, are influenced by and can influence numerous other systems, including the natural environment, the political system, and local communities. Understanding responsible enterprise in this way also prevents thinking about social and environmental problems from an isolated narrow philanthropic perspective. Systems thinking requires us to analyze responsible enterprise as not ending at the borders of the corporation. Instead, responsibility is determined by the interplay of different systems that are shaped by and shape business practices.

Western philosophy and Western science underpin the capitalist economic system in which we live today throughout much of the developed world. Western science, including the social science of economics, tends to approach its subjects by taking them apart and reducing them to their smallest elements—a linear process of atomization or fragmentation. Once the smallest elements or fragments have been understood, the Western approach is to reintegrate the parts and thereby figure out how they work as an integrated whole. This approach derives from thinkers such as Descartes, is premised on Newtonian physics, and is empiricist in its orientation in that it seeks observable evidence in coming to its conclusions; it tends to assume that linear cause-and-effect relationships exist and can be explained scientifically. But this reduction of things to their fundamental parts or atomistic elements also separates the material elements (body) from nonmaterial aspects of the world like consciousness, emotions, aesthetic appreciation, and spirituality.

In simple terms, Western thinking has largely separated and fragmented the mind and body, paying little attention to heart, spirit, community, or meaning, none of which is directly observable. It has, in some respects, done much the same thing to the environment, making some people forget (or ignore) our very human interdependence with the cycle of nature, a nonlinear set of relationships. In addition, technological advances have sometimes made progress seem inevitable, as if a solution to whatever problems arise is always just around the corner. The Western approach tends to lessen people’s ability to think about the system as a whole, which also reduces their ability to think about systemic and ecological impacts of business actions.

SYSTEMS THINKING

A cloud masses, the sky darkens, leaves twist upward, and we know that it will rain. We also know that after the storm the runoff will feed into groundwater miles away, and the sky will grow clear by tomorrow. All these events are distant in time and space, and yet they are all connected within the same pattern. Each has an influence on the others, an influence that is usually hidden from view. Understanding the system of a rainstorm requires contemplating the whole, not any individual part of the pattern.

Business and other human endeavors are also systems. They, too, are bound by invisible fabrics of interrelated actions, which often take years to play out their effects on each other. Since we are part of that lacework ourselves, it’s doubly hard to see the whole pattern of change. Instead, we tend to focus on isolated parts of the system and wonder why our most vexing problems never seem to get solved.

SOURCE: Peter Senge, The Fifth Discipline: The Art and Practice of the Learning Organization, revised edition (New York: Currency Doubleday, 2006), pp. 6–7.

The fragmented or atomistic approach has come under severe criticism in recent years, for reasons that management thinker Peter Senge highlights. Many people now believe that a more integrated approach, in part ecologically based and in part based on an integration of mind and body (or material and nonmaterial), better speaks to the long-term needs of human beings and the communities and organizations to which they belong (see the box on Systems Thinking). The systemic approach will be particularly critical in the technologically complex and ecologically resource-constrained future, where issues of climate change and ecological sustainability will very likely dominate important business decisions, and where an understanding of the impacts of one part of the system on the other will be increasingly necessary.

A systemic approach to responsible enterprise and sustainability has been fueled by the development of chaos and complexity theories, which shed light on the behavior of complex systems, a set to which human-created systems clearly belong. It has been further advanced by quantum physics, astrophysics, and biology’s new understandings of the nature of matter and the interconnectedness of all living things, as well as between living and nonliving matter.²³ The emergence of economies with alternative points of view provides an interesting and important contrast to this atomization and fragmentation. Eastern philosophies and approaches tend to be more holistic in their orientation than Western ones, so the development of major economic powers like China (at this writing the world’s second largest economy), India, and the other two BRIC nations (Brazil and Russia) portends significant change in the ways that economies are established and in their foundational principles.

Such developments have highlighted the need for a more integrated approach to understanding the impact of human beings, and the economic organizations they create, on the world and in particular on the natural environment. One seminal work emphasizing a systems approach to management is