Bogot Colombia November 8 2013 Companies Need a

Bogotá, Colombia November 8, 2013

Companies Need a Higher Purpose “When we come out of this fog, this notion that companies need to stand for something – they need to be accountable for more than just the money they earn – is going to be profound. ” Goodman estimates that it may cost 20 -50 times as much for B 2 B situations. Jeff Immelt, Chairman and CEO, General Electric 2

What is Corporate Social Responsibility? • Corporate social responsibility (CSR) is a commitment to improve community well-being through discretionary business practices and contributions of corporate resources. • One major aspect is planet sustainability, doing everything as a company to eliminate waste, to encourage recycling and reusing, and to prevent or reduce pollution of air and water. This would apply as well to encouraging your suppliers and distributor partners to participate in sustainability, down to even choosing the partners who practice sustainability. • Another aspect is to apply social marketing, encouraging your customers to change behaviors that hurt them, their peers, or the society at large.

Timberland Illustrates Sustainability Our two areas of focus for environmental stewardship are protecting our outdoors and creating durable, repairable and recyclable products made from environmentallypreferred materials. 1. Protecting our Outdoors • �Solar panels produce approximately 50% of the energy needs of our 500, 000 square foot distribution center in Ontario, CA • �Our European Distribution Center, Holland has been 100% powered by wind, waste steam and small-scale hydro-power sources since 2002 • �Replacing our rock ballast roof with a reflective white roof, which saves on air conditioning costs • �Replacing all of our T 8 fluorescent lighting with more efficient T 5 fluorescent lighting • �Installing occupancy sensors in all offices and conference rooms 2. Innovate Cradle to Cradle Product • Bootmaking uses energy, chemicals, and resources—all of which contribute to pollution. • Timberland’s Green Index® Rating Timberland’s Green Index® rating measures aspects of the environmental impact of our footwear from raw material extraction through end of the assembly line. Extracted passages from Timberland Environmental Stewardship Overview Fact Sheet

Social Marketing • The field of Social Marketing started with my co-authored article Philip Kotler and Gerald Zaltman, “Social Marketing: An Approach to Planned Social Change, ” Journal of Marketing, July 1971, Vol. 35, Issue 3, pp. 3 -12. • Social marketing consists of efforts to influence behavior change regarding public health, education, the environment, and community well-being. • Social marketing has been applied to reduce tobacco use, decrease infant mortality, stop the spread of HIV/AIDS, prevent malaria, eradicate guinea worm diseases, make wearing a bike helmet a social norm, decrease littering, increase recycling, etc. See Nancy R. Lee and Philip Kotler, Social Marketing: Influencoing Behavors for Good, 4 th edition, 2011.

Objections to CSR • Finance thinks that it is a waste of money. • Some key managers think that it is a distraction from the core business. • Many customers don’t know or pay attention to a company’s standing on social giving. • Some shareholders complain that they have put their capital at risk. Lower profits paid to the shareholders will lead to higher capital costs. • Shareholders prefer to decide on the charities that they personally want to support. Milton Friedman, Nobel prize economist, opposed CSR: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game. ”

Question • “Does sponsoring a charitable cause (e. g. , Boys’ and Girls’ Scouts for a Better Environment) provide a better return on investment of marketing dollars than sponsoring your company name on a NASCAR race-car team? • How many agree? • How many disagree?

Those Favoring CSR • Michael Porter: “It is true that economic and social objectives have long been seen as distinct and often competing. But this is a false dichotomy. . . Companies do not function in isolation from the society around them. In fact, their ability to compete depends heavily on the circumstances of the locations where they operate. ” • Michael Porter offers four justifications for CSR: – Moral obligation, – Sustainability, – License to operate – Company reputation

Traditional Approach: Fulfilling on Obligation • 1980 s: – Doing good to look good. – Establishing a fixed annual budget, sometimes tie to revenues or pretax earnings – Giving to many causes, mostly unrelated to the business – Avoiding controversial causes – Mostly writing a check – No effort to measure how much good had occurred

Current Approach to CSR • 2010 s – Doing well and doing good – Selecting a few strategic areas that fit with corporate values and corporate goals – Supporting issues that provide opportunities to meet marketing and brand objectives – Taking on issues the community and customers and employees care most about – Making long-term commitments, offering in-kind contributions such as corporate expertise, technological support, access to services and donation of retired equipment – More interest in evaluating What good did we do? – More use of digital, social and mobile communications to engage stakeholders in corporate social initiative

Trends in CSR • Establishment of a corporate social norm to do good leading to increased corporate giving and investment to causes. • Increased corporate reporting on social responsibility initiatives. More than 95% of the Global Fortune 250 companies reported. • From giving as an obligation to giving as a strategy. Almost half of the companies report gaining financial value from their CR initiatives. • A shift to making long-term commitments to specific social issues and initiatives.

What Do Most Business Executives Think About CSR? • Most executives acknowledge the importance of social and environmental responsibility to the bottom line (82%), to their companies’ reputations (59%), and to their customers (53%). • Four out of five executives believe the role of corporations goes beyond simply meeting obligations to shareholders. • About 10% of company leaders don’t practice corporate citizenship saying their only obligation is to make a profit, pay taxes, and provide jobs. • At the other 10% extreme are companies such as Timberland, Ben & Jerry’s, Body Shop, Newman’s Own, and Patagonia who believe in social activism.

Sample of Corporate Statements • General Mills: “Our goal is to stand among the most socially responsible consumer food companies in the world. ” • IBM: “Addressing the issues facing the world now – from clean water, better healthcare, green energy and better schools, to sustainable and vibrant cities, and an empowered work force and citizenry—does not pose a choice between business strategy and citizenship strategy. Rather it represents a fusion of the two. • Nike: “Never has business had a more crucial call to innovate not just for the health and growth opportunities for our companies, but for the good of the world. ” • Starbucks: “Today, perhaps more than ever, people are looking to the business community to help address many of the complex issues facing our world. At Starbucks, we acknowledge that responsibility, and will once again set a new standard of corporate responsibility. ”

Why Do Good? • It looks good to consumers, employees, distributors, suppliers, investors, financial analysts, business colleagues, in annual reports, in the news, and maybe even in congress and the courtroom. • There is growing evidence that it does good for the brand, the bottom line, and the community.

Companies Are Increasingly Being Rated on Social Responsibility • The Council on Economic Priorities evaluates company performance on a range of social dimensions and publishes Shopping for a Better World to influence consumers’ purchasing decisions. • Fortune magazine annually rates “Most Admired Companies” where social responsibility is included as a factor. ” • Fortune magazine annually rates “Best Companies to Work For. ” • 84% of Americans in 2002 said that they “would be likely to switch brands to one associated with a good cause, if price and quality were similar. ”

America’s 100 Best Corporate Citizens • Each year Business Ethics publishes the 100 best American companies out of 1, 000 that are evaluated. • They evaluate the degree to which the companies serve seven stakeholder groups: shareholders, community, minorities and women, employees, environment, non-U. S. stakeholders, and customers. • Information is gathered on lawsuits, regulatory problems, pollution emissions, charitable contributions, staff diversity counts, union relations, employee benefits, awards, etc. Companies are removed from the list if there are significant scandals or improprieties. Source: Business Ethics, Spring 2003, p. 6. The research is done by Kinder, Lydenberg, Domini (KLD), an independent rating service.

Besides Magazines, Who Else is Rating Your Company?

Why Should Mc. Donalds and Coca Cola Especially Do Good Works?

Changing the Soul of Capitalism • R. Edward Freeman in 1984 made a strong case for a stakeholder, not shareholder view of business: “stakeholder relationship management (SRM). ” • “How are we going to make this company an instrument of service to society even as we fulfill our obligation to build shareholder wealth? ” • “This country has been too steeped in materialism and selfcenteredness, in having rather than being. ” • Humanistic companies create emotional value, experiential value, and social value, in addition to financial value. • Humanistic companies focus on five stakeholder groups. – SPICE: Society, Partners, Investors, Customers, and Employees. • These companies contrast to those without a soul: GM, Wal-Mart, etc.

CSR Can Help Offset the Public’s Distrust of Business • Some high profile business scandals in recent years – Enron, Tyco, World. Com • Some bad decisions – Shell Oil sinking of the Brant Spar in the North Sea – Pharmaceutical companies resisting lowering prices for African victims of HIV/AIDS – Nike’s brush with a charge of child labor • Outlandish payments to corporate leaders – A chief executive receives an $82 million pension after his company loses billions in shareholder value. – A throng of executives have spent years shifting stock option dates to fatten already-bulging paychecks. • 84% of Americans agreed that they “would be likely to switch brands to one associated with a good cause, if price and quality were similar. ” • The rise of Business Ethics managers within global corporations and citizen “watchnets” and “whistleblowers. ”

Rationale for Companies Investing in Social Initiatives • Companies need to differentiate themselves. Companies with civic virtue will be preferred. • Companies need a decision framework for facing daily requests for sponsorships, improved health coverage, injury prevention, environmental protection and community contributions. • Corporate heads and boards need to understand the social pressures and opportunities facing their companies. • Companies need to build a bank of public goodwill to offset potential criticisms. • Employees, investors, and partners will be more motivated and loyal. Source: Sandra A Waddock and Samuel B. Graves, “The Corporate Social Performance. Financial Performance Link, ” Strategic Management Journal, vol. 18: 4, pp. 303 -319, (1997).

Positive Impact on Corporate Performance • Business for Social Responsibility reports several benefits: – Increased sales and market share – Strengthened brand positioning – Increased ability to attract, motivate, and retain employees – Decreased operating costs – Increased appeal to investors and financial analysts See the evidence for all of these in Good Works, pp. 38 -45.

Consumers Favor CSR • 94% of consumers report that they are likely to switch brands about equal in price and quality, to one that supports a social issue. • 91% say they will buy a product associated with a cause if given the opportunity • 81% say they will donate to a charity supported by a company they trust, given the opportunity. Source: Cone Communications survey

The Main Steps in Developing a CSR Program • Choosing a Social Cause • Selecting an Initiative to Address the Cause • Developing and Implementing Campaign Plans • Evaluating the results for recipients and company

Choosing a Cause • Name of your company _______________ • Choose a product line ________________ • Propose three alternative causes for your company to support. – 1. – 2. – 3. • • • Which cause do you prefer and why? _________________________ Do you believe that it will result in higher or lower profits? _________________________ How will you measure the results? __________

Company Support of Causes • The most-often supported causes are four: – community health – safety – education – the environment • Company support may include: – cash contributions – In-kind services – sponsorships – employee volunteers – access to company facilities and distribution channels – matched giving schemes – event support – cause-related marketing

Causes • Health – AIDS prevention, early detection of breast cancer, timely immunizations • Safety – Designated driver programs, crime prevent, use of car safety restraints • Education – Literacy, computers for schools, special needs education • Employment – Job training, hiring practices, plant locations • Environment – Recycling, elimination of the use of harmful chemicals, reduced packaging • Community and economic development – Low interest housing loans, mentoring entrepreneurs • Other – Hunger, homelessness, protecting animal rights, exercising voting privileges, anti-discrimination

What are some major social causes that companies adopt? BREAST CANCER GENERAL MILLS BETTER NUTRITION TRAFFIC SAFETY THE HOME DEPOT HABITAT FOR HUMANITY REDUCING OBESITY PREVENTING AIDS MOTOROLA REDUCING SOLID WASTE See Philip Kotler and Nancy Lee, Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause, Wiley 2005. 28

Criteria for Selecting a Good Cause • Consistent with the product line and company reputation. • Helps recruit the kinds of employees company needs. • Makes a significant impact on the target market. • Likely to generate strong word-of-mouth. • Can draw attention as a good deed.

Best Practices • Choose only a few social issues to support that are a concern to communities where you do business and align with company’s mission and values and which support business goals and inspire employees and customers and can be supported for a long time. • Select multiple initiatives for a single cause rather than several causes • Establish clear and measurable objectives for the client and the company. • Measure and report outcomes for the company and cause.

Why Reputations Matter • Customers – Reputation affects purchase decisions • Employees – Reputation affects decisions to engage, commit, and stay • Investors – Reputation affects investment decisions • The media – Reputation affect coverage • Financial analysts – Reputation affects ratings Source: Ibid. , Fame & Fortune

A Business Adopts an Interesting Cause The Hyperion Company, a Business Performance Management software company, offered its employees $5, 000 to be used toward the purchase of a hybrid car. They have 2, 500 employees. This can cost the company $12, 500, 000. Would you as an investor in this company object?

SIX OPTIONS TO DO GOOD 1. 2. 3. 4. 5. 6. Cause Promotions Cause-Related Marketing Corporate Philanthropy Corporate Community Volunteering Socially Responsible Business Practices Corporate Social Marketing GOOD WORKS! Marketing & Corporate Social Initiatives that Build a Better World and the Brand. Kotler, Hessekiel, Lee (Wiley, June 2012)

1. CAUSE PROMOTIONS Building awareness and concern for a social issue • Starbucks Annual Cup Summits with 150 industry leaders including competitors Choose a social cause to involve other companies in__________

2. CAUSE-RELATED MARKETING Corporation links monetary or in-kind donations to product sales or other consumer actions • Starbucks contributes 5 cents to the Ethos Water fund for every bottle sold in stores Tom’s Shoes gives a pair of shoes to a poor person for every pair you buy. Write down what your company might offer_______________

3. CORPORATE PHILANTHROPY A corporation makes a direct contribution to a charity or cause, most often in the form or cash grants, donations and/or inkind services. • Starbucks gives grants for environmental education program for youth in Malaysia Give an example from your company. _______________

4. CORPORATE COMMUNITY VOLUNTEERING Corporation supports and encourages employees, retail partners and/or franchise members to volunteer at local community organizations and causes • Starbucks employees in Kuwait volunteer to plant a school’s garden Choose a local cause ______________

5. SOCIALLY RESPONSIBLE BUSINESS PRACTICES A corporation adapts and conducts discretionary business practices and investments that support social causes to improve community well being and protect the environment. • Starbucks seeks to achieve LEED certification for all new company-owned stores (Leadership in Energy and Environmental Design) What environmental improvement should your company make? _______________

6. CORPORATE SOCIAL MARKETING A corporation supports a behavior change campaign. • Starbucks offering free 5 pound bags of used coffee grounds to enrich garden soil What behavior change campaign can your company adopt? ____

Best Practices • Choose only a few social issues to support • Choose that are of concern in the communities where you do business • Choose causes that have synergy with mission, values, products, and services • Choose causes that have potential to support business goals: Marketing, supplier relations, increased productivity, and cost reductions • Choose issues that are of concern to key constituent groups: employees, target markets, customers, investors, and corporate leaders • Choose causes that can be supported over a long term.

Developing Social Initiative Programs • Form internal, cross-functional teams to develop plans • Include community partners in plan development • Establish clear objectives and measurable goals (outcomes) for the company • Establish clear objectives and measurable goals (outcomes) for the cause • Develop a communications plan • Identify and plan for additional strategic elements • Get senior management buy-in

How can the company measure the impact of its social giving on the recipients and on itself? • Determine purpose of evaluation • Measure and report resource costs and outputs • Measure and report outcomes for the company based on initiative objectives and goals • Measure and report outcomes for the cause, based on initiative objectives and goals • Monitor status of social issues that initiatives are supporting • Allocate adequate resources for measurement and reporting Write down the measures that your company is using to evaluate: (a) The impact of your social giving on the recipients (b) The impact of your social giving on your reputation, turnover and profitability

Companies Americans Love Amazon, Apple, Best Buy, BMW, Car. Max, Caterpillar, Commerce Bank, Container Store, Costco, e. Bay, Google, Harley. Davidson, Honda, IDEO, IKEA, Jet. Blue Johnson & Johnson, Jordan's Furniture, L L Bean, New Balance, Patagonia, Progressive Insurance, REI, Southwest, Starbucks, Timberland, Toyota, Trader Joe's, UPS, Wegmans, Whole Foods. These “firms of endearment” were highly profitable. They outperformed the market by a 9 -to-1 ratio over a ten-year period. More fulfilled employees, happy and loyal customers, innovative and profitable suppliers, environmentally healthy communities.

Winning Through Stakeholder Value Creation 1. These firms align the interests of all stakeholder groups 2. Their executive salaries are relatively modest 3. They operate an open door policy to reach top management 4. Their employee compensation and benefits are high for the category; their employee training is longer; and their employee turnover is lower 5. They hire people who are passionate about customers 6. They view suppliers as true partners who collaborate in improving productivity and quality and lowering costs 7. They believe that their corporate culture is their greatest asset and primary source of competitive advantage. 8. Their marketing costs are much lower than their peers while customer satisfaction and retention is much higher. – Triggering great word of mouth rather than heavy brand advertising (Google and Starbucks did little advertising) – They do not rely on frequent sales or heavy promotion

There Are Risks and Costs of Being a Good Corporate Citizen • • • The company will be deluged with funding solicitations. Stockholders may sue. Difficult to terminate CSR sponsorships. Risk of seeming hypocritical (Mc. Donalds). Risk of a scandal that makes a lie of the company’s claim to social responsibility. Visibility for corporate efforts may be lost. Coordinating with cause partners can be time consuming. Staff time and involvement can be significant. Efforts may require external expertise. Promotional expenses can be significant. Consumers may be skeptical of corporate motivations and commitment. Tracking resource expenditures and value can be difficult and expensive. • Check the three risks or costs of most concern to your company. • For each risk or cost, what can you do to manage it?

Does Corporate Giving Enhance the Company’s Reputation? • What is the effect of the Bill and Melinda Gates Foundation that is spending billions to fight malaria, TB, and AIDS on Microsoft’s reputation? • What is the effect on Warren Buffett’s businesses as a result of his gift of $31 billion to the Bill and Melinda Gates Foundation? • What is the effect of Sir Richard Branson’s $3 billion commitment for alternative fuel research on Virgin businesses? • Gates, Buffett, Virgin and Google may well be changing the rules of corporate philanthropy, with the perceived sizes of their commitments

Under What Conditions Will Corporate Social Responsibility Lead to Higher Profits? • When a higher proportion of the target market or public in that country cares about company social responsibility. • When the company is significantly more socially responsible than its competitors. • When the company’s competitors have been tainted with scandals. • When the company’s products, services and value delivered are superior to its competitors.

Research Findings between FP and SP • The correlations between financial performance (FP) and social performance (SP) is sometimes positive, sometimes negative, and sometimes neutral, depending on the study. • Even when FP and SP are positively related, which causes which? • Most probable finding is that high FP firms invest slack resources in SP and then discover the SP leads to better FP, in a virtuous circle. • Companies may use Pascal’s Wager to justify social responsibility investments. Source: Sandra A Waddock and Samuel B. Graves, “The Corporate Social Performance. Financial Performance Link, ” Strategic Management Journal, vol. 18: 4, pp. 303 -319, (1997).

Earmarks of a Socially Responsible Firm • Lives out a deep set of company values that drives company purpose, goals, strategies and tactics. • Treats customers with fairness, openness, and quick response to inquiries and complaints. • Treats employees, suppliers, and distributors fairly. • Cares about the environmental impact of its activities and supply chain. • Behaves in a consistently ethical fashion. If each of these is worth 5 points, how does your company rate? _________

Recommendations • A company should determine its civic positioning as well as its market positioning. • Simply giving money to philanthropy doesn’t mean you have core values, a core purpose and core goals. • Social responsibility can be carried out for selfish reasons as well as selfless reasons. It guarantees the continuation of a healthy society and economy. • A company that adopts stakeholder theory will have to change its culture, structures and systems. • A company should consider setting up two groups: – A CSR group (external and civic) – An ethics group (individual employee issues) • A company should encourage its investors to take a longer view of company goals and strategies. • A company should include in its annual report its performance on its social initiatives.

Your actions flow into the rest of the world….