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“CSR Guidelines for Private Sector Companies and Their Measurement Indicators" - Dr. Gustavo Yepes

“CSR Guidelines for Private Sector Companies and Their Measurement Indicators" - Dr. Gustavo Yepes

Good morning to all. It is a great honor for me to be in Paraguay for the first time and receive this invitation from the Embassy.

I want to give a special thanks to Ivan Sarmiento and Raquel for the invitation and for all the efforts that we have already seen, which have come together here.

Very well, I am going to ask you to help me with the presentation. While they pull it up, I will tell you a little bit about what I am going to talk about. They asked me to give you, a bit of a context about what the responsibilities are for companies, so that you may understand how  coroporate responsibility is aligned with a company’s business, and how at this moment in time the private sector can have an active participation in looking for solutions to some of the planet’s main problems.

We are faced with a paradox; we have a world that had never been so rich – monumental constructions, increasingly comfortable life styles, we can travel, we can access a quantity of goods and services that we had not even imagined before.

At the same time, however, we are facing a world that had never been so poor – 1.03 million people are hungry and there are another million who eat very little, and it is not because they are on a diet, but because they basically do not have access to food in a world that produces food every day for 12 million people, and we are 7 billion.

We are faced with a situation that is a little complex and practically inexplicable, of how people are hungry when there is food left over.

So, we will try to understand how the private sector can contribute to try to overcome that paradox that afflicts our planet.

Very well, first let's understand a bit of context so that we re-visit the role of corporate responsibilities; and for that we have to first understand that we have a different world. There used to be three worlds.

When we talk about the "first world" we refer to countries that have open market economies, where the center is the citizen, the citizen is the one who trades goods and services in the markets.

In the XVII [century] a new economic and political form began called “the second world” that was formed in the XIX with the union of Soviet Republic Socialists.

The alternative was a bit different, there was a market, but it was centrally planned. That is, it was not the citizens, but the government that defined the products and services that went to the markets; and the citizen took a somewhat second-class position because he/she would work and purchase what the government said.

There was a third alternative, called “the third world”. The third world initially referred to countries that had closed market economies, why? They did not want to compete with those other countries and they did not like the second world either, and therefore, we had an alternative.

As you all know, in 1989 the second world began to disappear with the fall of the Berlin Wall; and the third world, if you only think of the word you will immediately associate it with poverty and with delay.

The second world disappears and the third world collapses. The only alternative left for the world, then, is the first world, that's what they called the single thought. And what they basically said is that now it is the only way we have to see the world: an open market economy, where all countries are going to compete in a big market and where citizens will be the center of all this market.

Basically in that framework, countries that had been competing traditionally then had to begin competing, with certain advantages, with countries like ours (that were not used to competing); the advantages that perhaps Nelson mentioned previously.

A Latin American company could produce more inexpensively than a company in North America or Europe. Flexibility in legislation, misuse of natural resources, and some corruption or bad business, could generate certain advantages for these companies in the global markets. And then an important change in the world begins, standards are beginning to rise so that these “advantages” cannot be taken advantage of, which could on the one hand facilitate better competitive conditions for companies and, on the other hand, reduce the impacts that companies could produce.

Then a number of new business rules are born. We find that in order to start a business nowadays, they are increasingly asking to meet more standard rules, technical rules that will ensure that companies comply with those rules that the market wants.

Here, to give you an example, let's see how ... this is a small shop, this is Scotland, a shop like we see anywhere in the world or in Latin America; it sells ​​potato chips, sells soda ... However, you will see at the top, it has a Fair Trade seal and a woman of African descent, an African woman appears showing that they are selling a certain product, which has very particular characteristics and they have ensured traceability throughout the product; And they will find increasingly new products everywhere, with more and more mechanisms for verifying their performance throughout the supply chain.

What these kinds of conditions are basically allowing is that in order to reach the markets of high purchasing power, they are now required to comply with new rules of the game; which includes respect for human rights, and also includes the care of the environment, workers and transparency in all operations of the company. Even to get money (to grow a company we need money), now more and more the financial system begins to include new rules of the game.

The United Nations has launched an initiative called the Principles of Responsible Investment. The World Bank with its institution, IFC (the International Finance Corporation), proposes principles, in the case of lending to companies that have more than 10 million dollars for their projects. And then it begins, as you can see... access to sources of financing would then depend on the behavior of my company. Even if you go to the stock exchange to get financing too, they will require a number of indicators like the Dow Jones Sustainability, which will ensure that your company is more transparent and more stable and more secure.

Also, as you know, the internet, the media are increasingly easy to access and have greater impact, and access to them in some way, may or may not facilitate the reputation of the companies as a differentiator, a distinctive. And every time we find that companies that have a better reputation, begin to get the preference of consumers and have better financial results, and on the contrary, those who have a bad reputation, begin to be very affected.

Additionally, the consumer is the sovereign. The consumer is the one who has the preference or the companies dispute their preference, they then start looking for mechanisms to select certain products.

This is how coffee is sold in the United States. They are not talking about attributes, that it is softer, that it is better presented or cheaper, instead they speak of small producers, of great change, and stories that are increasingly becoming a differentiator or an advantage for people to select or choose a product.

Basically this is so we can understand that the world has changed, that the first world, that world of open market economies... as it is to demand rules. Rules for what? To access high-purchasing markets or to participate in these supply chains to access financing sources, to reduce the risk of image, reputation, license to operate, and of course, to have consumer preference.

Then these new rules of play begin to impose new conditions. Let's see what the conditions are then, which the current market demands.

Since the end of the nineteenth century, they began to talk about the role of entrepreneurs, especially businessmen, wealthy people; and there have been a number of alternative proposals about what the responsibilities of businessmen are.

After all these possibilities that have been presented and new academic perspectives, in the 90's a new proposal is formed, a proposal that is led by companies, from the private sector, who propose to assume certain responsibilities.

These responsibilities are defined... and I use this, which is the most important definition in the world at the moment because of the way in which the International ISO System is developed: it proposes mechanisms that are supported in more or less 72 countries to be able to define any of its norms or technical guides.

This is the definition of the ISO Guide 26000, which says that the responsibility of organizations today is the responsibility of the impact their decisions and activities have on society and the environment, through ethical behavior and transparency that is consistent with sustainable development and the well-being of society. It takes into account the expectations of the parties involved and complies with applicable laws, and is consistent with international standards of behavior, and is integrated throughout the organization.

This definition means that companies... even in 2010 when the ISO 26000 left, recognizes that not only companies, but organizations, such as state entities, universities, civil society organizations, must also be responsible for their activities and their decisions.

However, such definitions do not yet tell us what I should do to be a responsible company or be held accountable in the world. And for that, a number of institutions (which were mentioned), such as the United Nations Global Compact, the Global Reporting Initiative, the OECD or the Organization for Economic Development, or also international organizations such as the ISO, begin to propose new mechanisms to evaluate the performance of companies.

As you know, companies do not have a body to imprison, they do not have a soul to condemn, and using mechanisms that are used on people is a bit different. And therefore, all these types of institutions have defined criteria that can be combined in the following seven international criteria, in which the world asks companies to respond to the impacts they generate.

First of all, the world expects companies to generate a positive economic contribution to the local economy. What does this mean? That when I am working in a region, in a town or in a city, the impacts are positive for the economy; that means that I pay taxes, that means that I additionally hire local workers, and of course, that I have local suppliers. Only in the event that I can generate a movement of the economy in the region where I am operating, can I begin to be responsible and to be recognized as responsible in the world.

In addition, companies are also expected to reduce their impact on the environment. For this, entrepreneurs are asked to have new perspectives where the resources they use (raw materials, water or energy) do so in a much more efficient way; to be much more careful about the use of those resources.

They also ask that since they use these resources (raw materials, water or energy) to produce products, and they also produce by-products, which are: emissions, effluents and waste; they are told: reduce the production of emissions, effluents and waste. And have a very clear policy on how to be cautious, careful with natural resources, but above all, to invest in technology that is increasingly environmentally friendly.

In addition, the company is expected to have constructive relationships with its employees in all its processes, so that we can have a culture where the people who are part of the organization can thrive and succeed, just like shareholders do.

Companies are also expected to respect and promote respect for human rights. And it refers in particular to four rights: that there be no child labor, no forced labor, freedom of association, and no discrimination of any kind. What they seek is not only that the company respects it, but also promotes its respect in the supply chain.

As you know, the larger the supply chain, the more risks there are in violating human rights in a distant country, where the company is operating.

Additionally, companies are expected to be responsible with neighboring communities, which is to be a responsible citizen. That is, when a company arrives in a region (I’m not talk about taking pictures with poor children), but basically respect the neighbors. That if the company is going to produce smoke (they should warn them), protect them. Or, if they are going to take them out of their land, they have to do so with processes that are agreed with guarantors with the Government so that they do not affect those communities, but instead, communities can benefit from that implementation.

In addition, what we find is that companies must commit to combating corruption, bribery and monopoly practices so that the company serves a mechanism to reduce the serious problem that we have in the world, which is corruption.

And finally, companies are expected to have good relationships with their consumers; that when they sell the products, that they make sure that they are goods and not evils; that they do not damage their health, but if they do, to report that the product is harmful to health. That the information provided to the customer is not misleading and is completely clear so that it does not call for error. Finally, it is talked about how the customer’s information be kept confidential.

So with these elements I wanted to show how the issue of Social Responsibility in a business is explained.

So we are going to try to make it totally relatable with subjects that you handle every day in your daily activities.

There is a gentleman named Michael Porter, who is one of today's most important management gurus, and he proposes a value chain. The value chain for Mr. Porter is simply the amount of activities that you do every day in a company that in the end the will allow you to add the benefits that will simply be considered the utility of the company.

He then says that the value chain has primary activities, secondary activities, and that is what companies have traditionally focused on – being more efficient in those activities in order to maximize; have the widest possible margin of their activities.

However, since proposing social responsibility they are told, “You should not only focus on the margin, but also on the impacts that the activity produces”: positive economic impact on the environment, the local economy, human rights in labor issues; so that the company begins to identify not only the financial performance, but also its non-financial performance, on a voluntary basis, as was planned some years ago.

Yet, in 2012 in Rio de Janeiro they proposed something called Earth Summit, and they said: we are going to see where the world goes 20 years after the Rio Summit. In that document, which is called “The Future We Want”, the United Nations placed a paragraph, called paragraph 47, which invites governments to make a somewhat binding commitment to sustainable development. That is, that the governments that signed, like my country, that befriended paragraph 47, are obliged to have a public policy regarding Social Responsibility and the sustainability of their institutions, both public and private.

In 2014, in April, the European Union draws up a directive (which is like the step before drawing up a law) where it presses companies with more than 500 employees to report on their non-financial activities. There are even mechanisms such as E.R, which allow a company to make a simultaneous presentation of its financial and non-financial information.

If I have good practices, I will have good performance. We already know that performance has to do with the issues of economic, social and environmental sustainability (which we have already seen): positive economic impact on the local economy, less impact on the environment, constructive relationships with workers, respect for human rights, constructive relationships with neighboring communities, transparency and relations with consumers. I repeat this so that we keep them; in my class I give students a quiz so that they are motivated to learn.

When you have this performance, then you will have good answers. What are the answers? We saw them initially. I will have market responses or environment answers. It means, then, that I will have the possibility of accessing high purchasing power markets or the supply chains that go to those markets.

Many entrepreneurs in Latin America tell me: “Hey, but I do not export to high-income markets.” I tell them, “Yes, but you sell to a supply chain that does sell to those markets. If you want to participate in that market, you're going to have to comply with the new rules of the game. "

The access to sources of finance as I mentioned, the reduction of image and operating risks, license to operate, preference by consumers, some even speak of employee loyalty.

If you have good practices, you will have a good non-financial performance. If there is good non-financial performance, there will be a response from both the market and the environment. And if you have responses from the market or the environment, then you will have better income for competitiveness or better expenses for the subject of management. Or, if not, as financial resources get better, the investment will be much more efficient.

So if you have good practices, you will have good performance. If you have good performance, you will have good responses from the environment and the market. And if it has good results then it will get, as we say in my country: true love. That is, this is like the path in search of true affection.

You will say to me, “Well Gustavo, in theory it sounds very interesting, but what does that have to do with reality?” So I'm going to show you that somehow this has already been proven. If you see, this organization called Natural Capitalism conducts a review of studies around the world and finds more than 18 different studies, publishes 18, which shows how there is a clear relationship between business and corporate sustainability.

There is a business case in corporate sustainability. As you can also see there from a distance, on the table, you will find that there are a number of studies. Of 73 studies, sixty-one percent of the studies show that there is a positive relationship between the company's profitability and its social responsibility actions.

Additionally other empirical studies show that after 52 studies, sixty-one percent also find it. Therefore every time we see the literature in the world, studies have begun to show that corporate responsibility has a return on investment made by companies.

I did a study last year with the Superintendence of Industry and Commerce of my country, we ,made an agreement, it was also part of my PhD dissertation; we had a sample of 17,133 companies in Colombia, a sample quite large and representative. And we asked companies in my country if they practiced social responsibility or not; 38% answered yes, and of these we asked who invested in Social Responsibility.

Then we reviewed the profitability of these companies, of those that did and did not invest, and we compared it and we found that on average, Colombian companies that invest in social responsibility earn 60% more profitability than those who do not. That is, we have enough reliable information to prove that Corporate Social Responsibility pays.

However, we are faced with a rather strong ethical dilemma. When you, when we try to do these types of events and others, and we talk about the subject of transparency, it is always a little difficult to discuss, because some say, “You have to show employers that ethics do pay.”

The other day I started to think, well, and if ethics does pay, then why ethics? It is one of the discussions that we are going to give today, later on. That would mean, then, that to do things well we would have to win.

It seems that the market system has taken over everything in our world and seems to work. That's why I usually ask of entrepreneurs when they start asking me, “Well, what if I should include this? And for what reasons should I do it?” The first thing I say is, “Well, do it because it's right, because it is the least we should do as reasonable people and as people who are waiting for a better future for all; because it is the ethical.”

However, I also say that if it is not enough, it is because it is a good company. Because if you include Social Responsibility in your business agenda, not only will you be more recognized by the community, not only will you be recognized by society, but will be able to contribute to the profitability of your company, which is your objective – and is legitimate in order to obtain it. But I can also tell you that if you do not, in the short and medium term we could say that you are going to stay out of that market.

For example, in my country Bucaramanga shoes are very famous, they have developed a very good technique to develop shoes that sell in the United States and Europe, but every day more shoes are returned because the leather has chromium and the sole has lead, and that is how they have been produced for years.

So the issue is, either we change those ways or we will not be able to compete in international markets. Because somehow we are in this moment in the world with a great opportunity, we find the option we have – that has the private sector and that we have as entrepreneurs, to begin to change things incredibly without having to make much effort. We're just going to have to be very careful, we're going to have to be very smart; and while we can help others, we can improve the performance of our organization. So, it's no longer a sacrifice to do this kind of thing, and that's why I think we're here.

So we begin to understand how the world is functioning today and how a continent such as ours can begin, from the perspective of the business sector, to be much more constructive for the construction of nations and a continent that must be much more integrated. We must ensure that people do not remain isolated and we cannot continue to base our competitiveness on the pollution of our natural resources and continue to exclude the people of our countries, generating much more poverty than we already have.

I wanted then, basically (to conclude), that we are in a new competitive framework, where the rules of the game begin to mean something and where (depending on your activities) you could then do the relatable exercise that allows you to reduce the impacts of your chain of value, generating a profit for your company and for the society. And this would be the opportunity we have at this time to build a world for all.

Thank you very much.