Frontier and emerging economies such as Cambodia present companies with a specific set of challenges and risk, both real and perceived, beyond those found in more developed markets.
A risk category getting ever- increasing attention is that of “social risk”, roughly defined as the risk of waking up one morning to find your company’s name in the media for the wrong reasons.
Such unhappy media events present risk to the investor’s reputation or a company’s brand as a result of investment or operations in a given market. These risks are why all of the tuna sold in North America and Europe is marked as “Dolphin Safe”.
Unlike traditional business risk, where high risk results in a higher required rate of return, social risk tends to be a bipolar event, wherein a company will simply deem a market too risky to consider investment, even at high rates of financial returns.
Multinational branded firms and institutional investors including pension funds, insurance companies and university endowments are particularly sensitive to these issues, and for good reasons. As has been demonstrated in case after case involving household brand names, how a company shows up in the media matters a great deal.
Corporate Social Responsibility (CSR) is the label assigned to the collective set of activities companies use to ensure that what they do is perceived as ethical, sustainable and generally having positive impact on their stakeholders and the communities within which they operate, and minimisation of these risks.
Looking at the historical context, CSR is not a new idea. There are those who would argue that issues related to CSR, or rather lack of it, helped to bring down the British East India Company in the mid-1800s. During the century that followed, Upton Sinclair’s 1905 novel The Jungle called attention to conditions in the Chicago slaughterhouses that led to the passage of the Meat Inspection Act and the Pure Food and Drug Act of 1906 in the US.
In the 2007 book Colons & Coolies: The Development Of Cambodia’s Rubber Plantations, author Margaret Slocomb describes the issues faced by the French concessionaires developing Cambodians first rubber plantation during the 1920s and 1930s and shows that they are not significantly different from descriptions encountered by concessionaires in the media today.
While the old issues remain, new issues have emerged. Today CSR’s definition has broadened, encompassing concepts as diverse as philanthropy, treatment of animals, green house gases, corruption and employee relations to name just a few. Sometimes just making an investment into a market, whatever it is, can be seen as socially irresponsible, as in Myanmar only a year ago or South Africa during the Apartheid era.
In this age of social media, news of an incident in Cambodia such as a shooting at a garment factory or an economic land concession can be seen around the globe in a matter of minutes. Historically, most companies took a reactive approach to CSR. A reactive model, however, is risky and fundamentally insufficient for today’s participants in emerging markets.
CSR as a concept is not without its critics. How does a manager tasked with “maximising shareholder returns” reconcile the risks of entry into a frontier market in a socially responsible and environmentally sustainable manner? He or she does so through the analysis of the potential CSR related risks and, yes, rewards.
Most risks in frontier and emerging markets are magnified. CSR risks are no exception. “Exploitation,” rightly or wrongly, is a term more likely to stick when related to a Cambodian garment worker than to a member of the auto workers union IG Metall in Germany.
Investment and operations in emerging markets carry higher reputational risks to firms and brands. The density and aggressiveness of NGOs are typically inversely proportionate to the level of economic development of a market, resulting in a greater number of watchdogs monitoring government and commercial activities.
A core element of any CSR framework is the concept of “social cost”; the indirect “costs” of an enterprise spread across the community within which it operates. Regulation of these costs is the responsibility of the government institutions in developed markets. In their book Winning in Emerging Markets, Tarun Khanna and Krisha Palepu cite key characteristics and opportunities found in emerging markets that they call “institutional voids”.
One of these voids is weak government institutions and regulatory enforcement. Inconsistency in enforcement of regulations can make it difficult for companies to comply when others are not in compliance.
From a competitive standpoint, a strong CSR policy can result in a company effectively being forced to compete at a significant short-term disadvantage.
If a company has the same legal status as a “person”, it is not unreasonable for it to be held to the same social and ethical standards as a citizen of the communities it impacts.
The issue is that in frontier markets, the investors face a wider range of values that they need to accommodate. Ethical behaviour has subjective elements that generate risk. Certain stakeholders in a process may not feel the company is going far enough in its efforts, and they criticie accordingly. Stakeholder engagement is key to any successful CSR model, but because of the increased diversity of the stakeholders the tendency is to be more critical of less developed economies.
The American business community in Cambodia has recognised this and as a result AMCHAM formed a CSR Committee earlier this year. A key objective of the committee is to improve the communication and engagement between the businesses and NGO community.
Ethical behaviour is also subject to cultural context. Local managers may not view all of their actions in the same ethical light as their peers who are accustomed to operating in more developed markets. Whatever strategic CSR model is applied, communication of expectations and training in acceptable behaviour must be included.
There are significant potential rewards to a strong CSR programme but they are best described within the context of the basic models of CSR used in practice.
Most companies in developed markets operate with a mix of the two basic models of CSR that are in widespread practice today with varying degrees of effectiveness.
The institutional voids previously described provide many varied philanthropic opportunities for companies.
Historically philanthropic model based on donations to organisations or parties outside of the business entity itself. These efforts may or may not be of strategic benefit to the company. This model is typically self-described as “giving something back,” implying that the business has “taken” something from society.
This model has evolved in reactive manner to compensate for social costs of a business operation and efforts to improve a company’s image in an era of limited government regulation and management of social costs.
The reward companies typically enjoy is the image of being good corporate citizens. Critics and cynics might say that they are trying to hide something or that if their business practices were better in the first place they would not need to do this.
The flaw in this criticism is that companies do not have to do these things, but they place a value on the opinion of their stakeholders and as such take measure to positively influence those opinions.
In cases of donations to NGOs and other organisations, it effectively amounts to outsourcing CSR effort to organisations better able to achieve the desired results.
An excellent example of this is Starbucks Coffee, which has partnered with Conservation International to ensure the sustainability of its coffee sources and support its overall conservation efforts as part of its “Shared Planet” programme.
A second model, more strategic in its approach, and called Creation of Shared Value (CSV), has been championed by leading strategic thinkers including Michael Porter and Robert Kramer of Harvard Business School.
Fundamental to the model is the philosophy that for society to be successful it needs healthy commercial enterprises, and these enterprises should reflect the values of society or more specifically segments of the society, in which they operate.
This model integrates CSR into the core operations of the company and integrates the business into the community and/or society at large. Several of today’s leading brands were launched with CSR elements as part of their core business model, including Ben and Jerry’s Ice Cream, The Body Shop and Starbucks Coffee.
The inverse of social cost is social benefit; the benefit a company’s activities produce indirectly for which a company is not directly compensated .These companies have chosen to focus on one or more key areas and expect a premium for their product as a result.
This model, or a variation of it, is best suited for frontier and emerging markets.
Dr Mogen Pederson of International Woodlands Company of Denmark has supported the development of corporate social responsibility policies and programs for the company’s frontier market investments throughout the world, including Cambodia.
It is specifically focused on rural development. In his model, any CSR programme has to have mutual benefit to the local community and the company.
The core philosophy is to optimise the benefits to the community, which take the form of economic, social or environment impact and the benefits to the company in the form of “top line”, which means higher revenues, more product sales, premium prices, and “bottom line”, which means lower cost structure and lower “risk”, meaning lower potential impact of an identified issue.
What results is a symbiotic relationship between the company and the community through which the company provides key developmental capital and in many cases, social services typically provided by governmental institutions in developed markets.
The community provides a stable work force. Collectively, this framework lowers potential for conflict and more importantly, when conflict does arise, motivation for both parties to resolve it systematically, without violence.
There is an additional benefit not mentioned in his model: access to investment capital. The mitigation of reputational risk through successful implementation of such model makes a company more attractive to international investors sensitive to these types of issues.
For these investors, investment itself, and taking the incremental risk where few are ready to invest, may be seen as a CSR activity, creating jobs and demanding responsibility and sustainability in operations.
Successful CSR programs improve financial returns through enhanced brand image and awareness, premium pricing, attracting better people and reducing risk.
Daniel Mitchell is the CEO of Grandis Timber Limited and founder and managing director of SRP International Group Ltd, an investment firm focused on developing opportunities in emerging Asian markets.