King's College London

This year marks a half century from the Milton Friedman New York Times article that unleashed a corporate revolution.  Friedman argued that while businesses should act within the law, ‘shareholder value’ was the only value that they were obliged to pursue.  Thirty years on this remained the dominant business principle: around the turn of the millennium only about a third of Fortune 500 companies issued a Corporate Social Responsibility or sustainability report setting out their impact on other stakeholders such as local communities.  Now 93% do .  Increasingly multinational companies are rejecting the notion that they should only be accountable to shareholders and are making Corporate Social Responsibility (CSR) a central part of their strategies.

However, businesses often underestimate how hard it is to live up to their CSR strategies.  Incidents like the BP Deepwater Horizon accident show that when a company is not considered to be “walking the talk” it suffers deep reputational damage as well as potential regulatory and legal costs.  While popular opinion might blame a company’s very visible top managers, the distance between CSR strategy and on-the-ground reality is not necessarily down to the personality of the people at the top. Our research shows that there are often structural reasons for these failures, and that management solutions can be developed to avoid them.

Inevitable tensions between HQ and subsidiary interests

In a multinational firm, there are often tensions between global headquarters and local subsidiaries. Many of these are related to the difficulty of ensuring that subsidiary managers act in the best interest of the firm as a whole when they are generally assessed and rewarded on the economic performance of their own territory. 

For example, they may be tempted to use bribes to win contracts, or to hire underage workers to lower manufacturing costs. This may be seen as an acceptable way of doing business locally but would undermine the firm’s global ‘social brand’ in the eyes of customers, employees and other key stakeholders.

Most businesses try to manage this tension through by issuing global CSR strategies and standards to their foreign subsidiaries along with a directive to comply.  However, the geographically and institutionally remote HQ has no easy way to ensure that the directives are executed as intended, or how much a subsidiary manager is to blame for any lapse.  If a CSR policy requires extreme diligence in auditing suppliers’ labour standards, whose fault is it when sweatshop practices are exposed by the global media?  Perhaps the local managers did not do a proper audit.  Perhaps the supplier was exceptionally good at hiding the truth. Or perhaps the local manager, under pressure to achieve ambitious financial targets, convinced themself to ignore their suspicions. Nike, Apple, and Walmart can all testify to the complexity of these issues.

Lost in translation

The institutional, cultural and linguistic variations across a multinational firm can also pose a challenge. CSR directives cannot just be rolled out globally, they first have to be translated.  This means both literal translation and the process of infusing policies with new meanings that make sense in each subsidiary and reflect the social and environmental agenda in the country they operate in.

Gabriela’s study of the role of subsidiary translators found that local versions of CSR often differed substantially from the intended vision of the HQ.  Goals such as addressing investors, minimizing risk and enhancing the competitiveness of the multinational were supressed by managers who saw HQ’s requirements as irrelevant to, or even out of line with national practices and values.   The translation process can sometimes result in less CSR enforcement than HQ wants, and sometimes more adaptation to local contexts than it expects. Both outcomes may be helpful to the local subsidiary performance, but at the expense of global CSR consistency and therefore the global CSR brand.

More positively, the translation of CSR reporting can open the door to fundamental learning processes. In Gabriela’s study it brought to light new ways to leverage CSR reporting that HQ had not previously considered, for example in political debates and in engagement with non-traditional stakeholders. Finding the right balance is key: corporate headquarters can learn from local adjustments, while discouraging transformations that undermine the consistency of global CSR policies.

Collective responsibility and lack of trust

Subsidiary managers in multinational enterprises have joint stewardship of a global social brand: when there is a CSR lapse in just one location, the company is called to account in every country it operates in. One might assume that this interdependence would give each local manager a strong stake in agreeing and adhering to a consistent CSR policy.  But Christian’s research shows that collective self-interest only goes so far, because each individual manager is uncertain about what their counterparts are doing.  If they invest heavily in their CSR efforts and enforcement, the high costs are borne by the individual subsidiary alone but they are still exposed to the risk that the social brand is undermined by their counterparts’ irresponsible practices elsewhere.  As a result, subsidiary managers may consider slight under-investment in CSR efforts to be the most rational strategy.

Possible solutions

We suggest five things that multinationals can do to address these tensions and challenges:

• Build a global social brand to send a signal to your employees. While the media may sometimes (justifiably) characterize social branding as “greenwashing”, it also serves an internal role that can be especially important in large multinational firms. It sends a signal to employees and middle managers that they benefit from the CSR profile of the firm and stand to lose from irresponsible behaviour.

 

• Hire altruistic subsidiary managers and help them create networks. The mindset of subsidiary managers is crucial to the success of a global CSR strategy, so HQ should invest in screening for deep-seated social preferences in their hiring practices. The mangers’ mindset can also be reinforced through annual conferences, short-term assignments, and rotation across units, which will all improve coordination and enhance trust.

 

• Make NGOs and local media your watchdogs. Paradoxically, multinational firms can have an interest in opening themselves up to the critical scrutiny of NGOs and media. These organizations can play a role in the motivating subsidiary managers to follow CSR directives. Essentially, if it is difficult for HQ to monitor subsidiary managers, outside actors can do it for them.

 

• Support your local mangers’ CSR knowledge. Helping employees involved in CSR through education and by connecting them with internal and external stakeholders who can build their knowledge is especially important in locations where the language and relevance of CSR is still not widespread.

 

• Increase transparency. HQ should provide subsidiaries with an explicit statement of what aspects of the global policy are mandatory and what features are subject to modification before they are expected to implement it. This message should be reinforced in later stages and the HQ should be open to revisiting again these guidelines in conversation with the subsidiaries.

 

Ultimately, the objective of all these measures are to give subsidiary managers an understanding of global CSR strategies, trust in the firm-wide commitment to these strategies, and structures and incentives to execute them. Without these, the gap between CSR ambition and on the ground reality will not close.

 

 

Further Reading:

Micro-processes of translation in the transfer of practices from MNE headquarters to foreign subsidiaries: The role of subsidiary translators, by Gabriela Gutierrez-Huerter O, Jeremy Moon, Stefan Gold, Wendy Chapple

Orchestrating corporate social responsibility in the multinational enterprise, by Christian Geisler Asmussen and Andrea Fosfuri.

'A Friedman doctrine - The Social Responsibility of Business Is to Increase Its Profits', New York Times, 13 September 1970