WHY THE PROFIT MOTIVE WILL PUSH MULTINATIONALS TO ENFORCE HIGHER SOCIAL AND ETHICAL STANDARDS
As we all know, growing profits at a company boils down to a simple equation. Boost sales while holding prices and cutting costs and the profit margin widens.
For multinational companies, a preferred route to doing just that is to rely on volumes of scale. If you make and sell more products more cheaply and distribute with greater cost efficiencies, you gain bigger bucks.
With that in mind, a just-released report, “Shaping the Future: Solving Social Problems through Business Strategy,” from the Committee Encouraging Corporate Philanthropy (based on research by gold-plated McKinsey & Co.) finds that global companies nowadays are being called to account not only for their own ethical and social behavior, but also for the actions of all third-party suppliers and vendors that work with them around the world.
Or in corporate speak, across the value chain.
More than nine out of 10 (94%) of the CEOs polled at the CECP’s February 2010 Board of Boards conference felt they were “increasingly being held responsible for their entire supply chain on social issues.” So, says the report, “large multinational companies will need to enforce their high companywide standards not just within their companies, but among all vendors and suppliers system-wide.”
Now, if just one market for a multinational’s goods or services sets a high-level standard for environmental or ethical operations, the company is bound to implement that topmost standard as a model across all markets and supply chains worldwide. Why? Volumes of scale.
It’s way more cost-effective to standardize policies than to adjust on a market-by-market basis every time you ink a deal or finalize a transaction. If you must meet the standards of one demanding market, you might as well use that as your benchmark everywhere — even in places that don’t require such top level operations. Because – and here’s the key — it doesn’t pay if you don’t.
For starters, just consider the dollars it would take for the additional employees and their training and the herds of compliance lawyers and oversight and IT security costs and on and on. Easier to set the benchmark as a turnkey op and walk away to do more deals.
Right now, it’s fear driving such decisions. Multinationals are afraid of a PR disaster, claims the report. What used to be a local story can today go viral and turn into a nightmare. Missteps or misstatements that once blew over now blow CEOs (Hewlett-Packard’s Mark Hurd), government officials (Agriculture chief Tom Vilsak vis-a-vis Shirley Sherrod) and international companies (BP) totally out of the water. Companies that do not comply may, says CECP, “incur the public-relations risks that occur when a supplier fails to enforce standards, triggering product recalls.”
Marilyn Carlson Nelson, Chairman of Carlson is quoted, saying: “Business’s role has always been to identify needs and to fulfill those needs in a competitive, efficient way. That role has been expanded to include the expectation that business will work in an environmentally and socially friendly manner, and to hold our suppliers to the same standards. It has become a competitive differentiator.”
The likely result will be that over the next several years, multinational companies and all their suppliers and vendors will VOLUNTARILY decide to operate in greener ways, forging partnerships to set better standards for using natural resources. They might even lobby governments and international regulators to set clearer and universal standards for carbon use, water conservation and greenhouse gas emissions so there’s no question of compliance.
All because of the profit motive. Pretty cool.
To get there, all we, the world’s voters and consumers and citizens, must do is set the bar high enough.