Harvard Business School Working Knowledg e Archive

The Five Steps of Corporate Responsibility

1/17/2005
Nike and Nestlé learned the hard way: As society changes, we must constantly rethink how we do business. Most corporations pass through five stages as they move toward social responsibility. A Harvard Business Review excerpt.

Nike's tagline, "Just do it," is an inspirational call to action for the millions who wear the company's athletic gear. But in terms of corporate responsibility, the company hasn't always followed its own advice. In the 1990s, protesters railed against sweatshop conditions at its overseas suppliers and made Nike the global poster child for corporate ethical fecklessness. Nike's every move was scrutinized, and every problem discovered was touted as proof of the organization's irresponsibility and greed. The real story, of course, is not so simple.

Nike's business model—to market high-end consumer products manufactured in cost-efficient supply chains—is no different from that of thousands of other companies. But the intense pressure that activists exerted on the athletic giant forced it to take a long, hard look at corporate responsibility faster than it might have otherwise. Since the 1990s, Nike has traveled a bumpy road on this front, but it has ended up in a much better place for its troubles. And the lessons it has learned will help other companies traverse this same ground.

Over the past decade, I have worked with many global organizations, including Nike, as they grappled with the complex challenges of responsible business practices. This experience has shown me that while every organization learns in unique ways, most pass through five discernable stages in how they handle corporate responsibility. Moreover, just as organizations' views of an issue grow and mature, so do society's. Beyond getting their own houses in order, companies need to stay abreast of the public's evolving ideas about corporate roles and responsibilities. A company's journey through these two dimensions of learning—organizational and societal—invariably leads it to engage in what I call "civil learning."

Organizational learning
Organizations' learning pathways are complex and iterative. Companies can make great strides in one area only to take a few steps backward when a new demand is made of them. Nevertheless, as they move along the learning curve, companies almost invariably go through the following five stages.

"It's not our job to fix that." In the defensive stage, the company is faced with often unexpected criticism, usually from civil activists and the media but sometimes from direct stakeholders such as customers, employees, and investors. The company's responses are designed and implemented by legal and communications teams and tend to involve either outright rejections of allegations ("It didn't happen") or denials of the links between the company's practices and the alleged negative outcomes ("It wasn't our fault"). Think of Royal Dutch/Shell's handling of the controversy around carbon emissions. For years, the company—along with the rest of the energy sector—denied its responsibility for emissions created by the production and distribution of its energy products. Today, Royal Dutch/Shell acknowledges some accountability. But unlike some of its competitors, the company continues to resist environmentalists' demands that it accept responsibility for emissions from its products after they have been sold.

The trick is for companies to be able to predict and credibly respond to society's changing awareness of particular issues.

"We'll do just as much as we have to." At the compliance stage, it's clear that a corporate policy must be established and observed, usually in ways that can be made visible to critics ("We ensure that we don't do what we agreed not to do"). Compliance is understood as a cost of doing business; it creates value by protecting the company's reputation and reducing the risk of litigation. Until recently, for example, much of the food industry has understood "health" as the avoidance of legally unacceptable "nonhealth." When Nestlé came under fire for the health dangers of its infant formula—activists claimed that mothers in developing countries would end up mixing the powder with contaminated water, thereby compromising their children's health—its response for many years was to shift its marketing policies to make this hazard clear to new mothers rather than, for example, trying to educate them generally about ways to ensure their babies' overall nutrition. The current public debate on obesity highlights the same dynamics—food companies' instinct is to simply aim for compliance, while the public clearly wants a far greater commitment from them.

"It's the business, stupid." At the managerial stage, the company realizes that it's facing a long-term problem that cannot be swatted away with attempts at compliance or a public relations strategy. The company will have to give managers of the core business responsibility for the problem and its solution. Nike and other leading companies in the apparel and footwear industries increasingly understand that compliance with agreed-upon labor standards in their global supply chains is difficult if not impossible without changes to how they set procurement incentives, forecast sales, and manage inventory.

"It gives us a competitive edge." A company at the strategic stage learns how realigning its strategy to address responsible business practices can give it a leg up on the competition and contribute to the organization's long-term success. Automobile companies know that their future depends on their ability to develop environmentally safer forms of mobility. Food companies are struggling to develop a different consciousness about how their products affect their customers' health. And pharmaceutical companies are exploring how to integrate health maintenance into their business models alongside their traditional focus on treating illnesses.

"We need to make sure everybody does it." In the final civil stage, companies promote collective action to address society's concerns. Sometimes this is linked directly to strategy. For instance, Diageo and other top alcohol companies know that as sure as night follows day, restrictive legislation will come unless they can drive the whole sector toward responsible practices that extend well beyond fair marketing. Among other activities, these companies have been involved in educational initiatives that promote responsible drinking. Likewise, energy companies understand that their industry has to grapple with the sometimes unethical ways in which governments use the windfall royalties they earn from oil and gas extraction. So they are supporting the UK's Extractive Industries Transparency Initiative, which urges governments to report the aggregate revenues they derive from resource extraction. Some organizations look even further ahead and think about metastrategy: the future role of business in society and the stability and openness of global society itself.

Societal learning
A generation ago, most people didn't think tobacco was a dangerous health threat. Just a few years ago, obesity was seen as a combination of genetics and unhealthy lifestyle choices—certainly not the responsibility of food companies. Today, ageism is rarely seen as a corporate responsibility issue beyond compliance with the law—but in an era of dramatic demographic shifts, it soon will be.

The trick, then, is for companies to be able to predict and credibly respond to society's changing awareness of particular issues. The task is daunting, given the complexity of the issues as well as stakeholders' volatile and sometimes underinformed expectations about business' capacities and responsibilities to address societal problems. Many civil advocates, for instance, believe pharmaceutical companies should sell lifesaving drugs to the poor at reduced prices; after all, the drug companies can afford it more than the patients can. The pharmaceutical industry has claimed over the years that such price limits would choke off its research and development efforts. But today, drug companies are exploring how to sustain R&D while pursuing price reductions in developing countries and how to integrate the prevention of illness into their business models.

Danish pharmaceutical company Novo Nordisk has created a practical tool to track societal learning on some of its core business issues—animal testing, genetically modified organisms, and access to drugs. The drugmaker's approach can be adapted and used by any company facing any number of issues. In the early stages, issues tend to be vague and their potential significance well below conventional thresholds used by the financial community to determine materiality. These issues are often first identified through a company's interactions with nontraditional sources of knowledge, such as social activists. As one senior business manager explains, when he deals with nongovernmental organizations, "I see the future of our markets, our products, and this business."

As issues mature, they become absorbed into mainstream professional debate and eventually into practice. Once leading companies adopt unconventional commitments and practices around certain societal issues, laggards must either follow suit or risk the consequences. In 1991, when Levi Strauss publicly launched its "terms of engagement"—which defined the labor standards for Levi's business partners and was one of the world's first corporate-conduct policies—every other company in its industry looked the other way, arguing that labor standards in other people's factories weren't their responsibility. When the Body Shop adopted human rights policies in the mid-1990s, most mainstream companies deemed its practices unfeasible. And when BP CEO Sir John Browne acknowledged in his infamous Stanford Business School speech that BP had a co-responsibility to address the challenges associated with global warming, he was taking a leadership role and betting that others would have to follow—as indeed they did. Each of these actions played a big part in dragging the rest of the players in the industry toward common approaches to responsible business practices.

Excerpted with permission from "The Path to Corporate Responsibility," Harvard Business Review, Vol. 82, No. 12, December 2004.

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Simon Zadek (simon@accountability.org.uk) is the CEO of AccountAbility, a London-based institute that promotes accountability for sustainable development, and a senior fellow at Harvard University's John F. Kennedy School of Government.