FINANCIAL TIMES: From a handout to a hand up: “The reputations of both Shell and Citigroup are under fire - the former over its reserves scandal, the latter over its controversial bond trading. Many companies see social programmes as a way to improve their reputation, especially when trust has been battered by scandals.” (ShellNews.net) 3 Feb 05

By Alison Maitland

Published: February 3 2005

As the World Economic Forum calls for action from all sides to tackle poverty, disease and the lack of education, some answers to the world's challenges are already emerging from boardrooms around the globe.

One trend is for companies to begin working together, alongside governments and development agencies, on problems too big for any one group to handle alone, such as the Aids pandemic.

"We are definitely seeing a much more sophisticated approach from companies that have been pioneers of community work," says Jane Nelson, an international expert on corporate responsibility and author of Partnering for Success, a report from the World Economic Forum's project on global corporate citizenship.

"Companies such as Rio Tinto, Anglo American, SC Johnson and Deutsche Bank are recognising that they need to move beyond one-off, ad hoc, community-type investment to much more systemic initiatives."

These initiatives range from alliances to tackle corruption - such as the UK government-led Extractive Industries Transparency Initiative - to programmes for better public services and infrastructure.

In South Africa, for example, 150 companies - including Accenture, Deloitte, PwC and Anglo American - are working with the education ministry, school administrators, parent/teacher associations and non-governmental organisations to improve education and facilities in state-run schools.

At the global level, the United Nations Development Programme is helping forge partnerships in Africa, Asia and central America between big business, governments, donors and local entrepreneurs. The dual aim of the initiative - called Growing Sustainable Business for Poverty Reduction - is to encourage businesses that target poor consumers and improve links between big companies and small local enterprises.

It is not easy to make such partnerships work, especially with many participants whose goals and expectations may differ. "This is not the panacea that is going to solve the world's international development challenges," Ms Nelson cautions. But she argues that the benefits of partnerships linked to business goals are potentially greater and more sustainable than corporate philanthropy.

One accusation levelled at corporate social responsibility is that it is too often divorced from the core business and can therefore lack influence and sustainability. A key feature of many new initiatives is that they relate directly to, and benefit, the business.

Sir Mark Moody-Stuart, chairman of Anglo American and of the 180-member Global Business Coalition on HIV/Aids, says it is in the interests of multinational companies to operate in well-functioning, rather than fractured, societies.

He cites Anglo American's partnership with the South African government in the Khula Mining Fund that invests in small black empowerment companies in the sector. "You might say: 'What are you doing encouraging future competition?' In our opinion, this is contributing to stability in the industry and addressing smaller mining activities we wouldn't do ourselves. It creates employment and reduces societal stress."

The Shell Foundation is also looking at sustainable solutions to social and environmental problems linked to the core business of the Royal Dutch/Shell group. It has piloted two investment funds that provide loans to small entrepreneurs in the energy sector in Uganda and South Africa.

These funds target two problems: the lack of access to energy among poor rural households and the fact that small business growth is often hampered by poor governance, corruption and the unwillingness of banks to make risky loans.

By using the Shell group's reputation as an inward investor, the foundation persuaded local banks to put up capital alongside its own finance. The funds offered a 5 per cent net rate of return that, although below commercial levels, was attractive enough to interest local banks.

This different approach to corporate social responsibility is attracting attention, notably at Royal Dutch/Shell but also at other multinationals, says Chris West, deputy director of the foundation and a former senior environment adviser to two UK ministers for international development.

"The idea is that if you put the viability of the business first, with potential financial returns, the development benefits will follow, rather than the other way around. Without financial viability, there is no prospect of scaling up these programmes to reach more of the poor."

A related approach is for companies to target what C.K. Prahalad, the US-based management writer, has called "the fortune at the bottom of the pyramid". His argument is that companies should stop seeing the 4bn people who live on less than $2 a day as a problem and start seeing them as a potential market for innovative products and services.

For more than 40 years, Citigroup has supported micro-finance initiatives as a form of philanthropy. Last year, however, it decided to look at them as a business opportunity as well. It appointed a senior banker to develop services and products for micro-lending programmes, initially in Mexico and India.

One example was a bond issued last year by Banamex, Citigroup's Mexican subsidiary, on behalf of Compartamos, a microfinance institution that wants to expand its customer base of mainly rural, female entrepreneurs to 1m by 2008.

Pam Flaherty, senior vice-president for global community relations at Citigroup, says the group's aim is to develop "a full range of banking services for the poor". But this is not a standard commercial proposition.

"There is not going to be a huge short-term profit," Ms Flaherty says. "But we think there is long-term potential. We can learn how to expand our market even more, and the best way seems to be this initiative."

The reputations of both Shell and Citigroup are under fire - the former over its reserves scandal, the latter over its controversial bond trading. Many companies see social programmes as a way to improve their reputation, especially when trust has been battered by scandals. High-profile philanthropic gestures may create a short-term image boost. But involvement in ways to alleviate poverty and disease could be more effective in rebuilding trust over the long term - provided they do not merely exploit undeveloped markets.

That has yet to be proven on a large scale. But companies need to seize the opportunities now, according to Ann Florini, director of the World Economic Forum's global governance initiative.

While she emphasises that primary responsibility rests with governments, she says the private sector has a crucial role to play. Bad or corrupt business practices contribute to conflict, poverty, human rights abuses and environmental decline. Conversely, responsible and profitable businesses offer huge potential to innovate, create wealth, share technology and improve the quality of life of millions of people in the developing world.

"It is not enough to avoid harm," says Ms Florini, who is senior fellow in governance studies at the Brookings Institution in Washington. "The business sector needs to be actively thinking about positive steps it can take, partly to restore trust and partly in its own interests. Businesses that catch on to this more quickly and start positioning themselves, not just in PR terms but in terms of business strategies, are the ones that are going to benefit very substantially in the long term."

CORPORATE RESPONSIBILITY HAS ITS LIMITS Business has become the "whipping boy" in the development debate, according to Sir Digby Jones, director-general of the Confederation of British Industry. He says that while companies could do better, governments in the developed and developing worlds should do more to address civil conflict, endemic corruption, trade barriers and subsidies. Consumers must also do their bit. "People are forgetting that other elements of our society have a social responsibility," he says. The pressure on business raises the question of where private sector responsibility begins and ends. "There is an accountability issue here and a democracy issue," says Ronnie Goldberg, senior vice-president for policy at the US Council for International Business. "We need to be careful. We do not want to live in a world in which unelected entities such as corporations are looked on to provide the basic services of government," she says. It is for governments to create the conditions - such as security and the protection of human rights - that ensure that development aid reaches the right people and that companies want to invest. "The biggest contribution companies can make to reducing poverty is investment and bringing jobs," Ms Goldberg adds.