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10 Jul, 2007

Global Businesses Face “Trust Gap,” Need To Reset Their “Moral Compass”

Global business leaders have been warned by a McKinsey Company survey that they are facing a “major trust gap” in how their companies are viewed by employees, consumers and the public.

GLOBAL BUSINESSES FACE “TRUST GAP,” NEED TO RESET THEIR “MORAL COMPASS”: Global business leaders have been warned by a McKinsey Company survey that they are facing a “major trust gap” in how their companies are viewed by employees, consumers and the public. Said one speaker: “It is up to society to tell business what its responsibility is, not up to business to establish what its responsibility is.”



GENEVA, 5 July — Global business leaders have been warned by a McKinsey Company survey that they are facing a “major trust gap” in how their companies are viewed by employees, consumers and the public. Speakers at the second United Nations Global Compact Leaders Summit here warned that many feel that businesses view corporate responsibility as “just PR and spin”. In addition to calls for businesses to focus on “ethics-based globalization” that aims at “mutually assured survival,” one of the most powerful messages came from Guy Ryder, General Secretary of the International Trade Union Confederation: “It is up to society to tell business what its responsibility is, not up to business to establish what its responsibility is.”

The Global Compact Leaders summit brought together some 1,000 chief executive officers, Government ministers, labour leaders and civil society representatives. The Compact itself involves more than 4,000 companies, trade unions and non-governmental organizations in 116 countries who have committed to 10 principles relating to human rights, working conditions, the environment and the fight against corruption.


In his opening remarks, UN Secretary-General Ban Ki-moon said the UN had created the Global Compact as an international movement of companies dedicated to advancing responsible business practices. But, he added, more work remained to be done. “In our interdependent world, business leadership cannot be sustained without showing leadership on environmental, social and governance issues. That interdependence brings with it a fundamental realization: that power cannot be separated from responsibility; that, for business to enjoy sustained growth, we need to build trust and legitimacy; that, for markets to expand in a sustainable way, we must provide those currently excluded with better and more opportunities to improve their livelihoods.”

He said that while the Global Compact had achieved significant progress, the business community was still too often linked to serious problems, including exploitative practices, corruption and income inequality. Mr Ban called on business leaders “to embrace the Compact as an organizing tool for your global operations”. They should ensure that their boards, subsidiaries and supply-chain partners used the Compact as both a management guide and a moral compass.

He called on trade union and civil society leaders to be “critical but constructive partners”, and on Governments to sustain their political, practical and financial commitment. “For my part, I pledge that the United Nations will extend its full support to all of you, so that we fulfil the Global Compact’s aspirations and vision.”


UN General Assembly President Sheikha Haya Rashed Al Khalifa said that for the UN to gain greater relevance it must learn to work better with business leaders. “We need to strengthen partnerships with business and civil society in order to better utilize your knowledge, expertise, access and reach,” she added.

Amnesty International Secretary-General Irene Khan said that to have human rights on the agenda of business was not important –- it was vital. However, the Global Compact’s human rights potential was not being fully realized. It was not enough for the Compact to teach compliance with the 10 principles, and de-listing companies that did not submit reports was a positive but insufficient step. What was needed was a robust peer review mechanism. “The best performing companies can help to raise the bar by holding each other to account,” she added, noting that both the United Nations and the Global Compact had a responsibility to ensure that there were no “free riders” in the Compact.

The International Trade Union Confederation’s Mr Ryder said corporate citizenship required the observance of certain rules. The Compact was grounded in principles recognized by law, and “it is up to society to tell business what its responsibility is, not up to business to establish what its responsibility is”. There was no alternative to established regulations, and the principle “do not harm” was perhaps the most appropriate for the Summit. Trade unions attached enormous importance to all the Compact principles, which must be applied in an integrated manner. The Confederation was concerned that not all countries recognized workers’ rights and that “many corporations spend millions to prevent workers from exercising their rights”, including the right to collective bargaining. Corporations should not engage in “corporate philanthropy”, because some of the world’s best philanthropists were “lousy employers”.

Prince el Hassan bin Talal of Jordan said a new “golden curtain” favoured the world’s richest 1.7 billion consumers, in a “continuing asymmetry” among global consumers. The “market-based globalization” was not a panacea, and an “ethics-based globalization” should instead aim at “mutually assured survival”. A “democratic deficit” affected Governments, international institutions and international governance, often tempering the capacity of Governments to properly address their most pressing problems.


French Foreign Minister Bernard Kouchner said Governments, business and civil society had the responsibility to manage the global commons. Sustainable development and the preservation of resources were not only an ethical and moral challenge, but also an economic one, and the price of inaction was just too high. The interest of companies lay in societies that were stable, peaceful and focused on the future.

He said the Compact needed rethinking because of the “limits of voluntary engagement”. What was needed was not “just a code of good conduct”; the task of Governments was to support the principles of corporate citizenship and, eventually, those principles would have to be made obligatory for those companies that did not comply. The principle of competition was “a method, not a faith”, and it would be unfair to impose the same kind of competition on developing countries as on developed ones.

Reports by Goldman Sachs, McKinsey and Company, and the Global Compact, presented at the Summit, show that an increasing number of business leaders see corporate responsibility as a way to build trust and to compete successfully.

Anthony Ling, Chief Investment Officer of Goldman Sachs, said capital markets were undergoing a profound shift. More capital was now focused on sustainable business models and the market was rewarding leaders and new entrants in a way that could scarcely have been predicted even 15 years ago. According to the Goldman Sachs study, Europe, Japan and the United States accounted for 75 per cent of global gross domestic product (GDP) in 2007, down from 89 per cent in 1991, while that of Brazil, Russia, India and China had grown from $3.6 billion in 2000 to $4.9 billion in 2005. The latter could reach parity with the world’s top six economies by 2030.

“The time has come for the financial industry to stop talking about incorporating values and to start doing it,” he said, adding that Goldman Sachs’ research was “pushing the cause of corporate sustainability”. The report showed that among six sectors covered — energy, mining, steel, food, beverages and media — companies that were considered leaders in implementing environmental, social and governance policies had outperformed the general stock market by 25 per cent since August 2005. In addition, 72 per cent of those companies had outperformed their peers over the same period.


Presenting his company’s CEO survey, McKinsey and Company Director Jeremy Oppenheim said 84 per cent of respondents felt there was a “strategic business case” for incorporating the Compact’s principles into their operations, but only 27 per cent believed the principles had been incorporated into their entire supply chain. A new “social contract” involving a new balance between developed and developing countries was needed in such areas as outsourcing, climate change, human rights and poverty issues.

McKinsey and Company’s survey of CEOs participating in the Global Compact showed that more than 90 per cent of them were doing more than they had five years ago to incorporate environmental, social and governance issues into strategy and operations. However, the survey revealed persistent performance gaps: while 72 per cent of CEOs said corporate responsibility should be embedded fully into strategy and operations, only 50 per cent felt their respective firms actually did so.

Oxfam International Executive Director Jeremy Hobbs said the McKinsey and Company survey confirmed the “major trust gap” in business held by employees, consumers and the public. It also reinforced the perception of many that business viewed corporate responsibility as “just PR and spin”, as well as a growing pressure for social responsibility by companies. Voluntary standards were not enough, as was apparent in the issue of corruption, and it was an illusion to think that climate change could be addressed through voluntary measures.

Business had been largely absent in the debate to “make poverty history” or on the Doha trade negotiations, in spite of its relevance for the world economy, he said. It must also become more involved in such issues as primary universal education, which could be provided all over the world for around $10 billion, and the growing inequality affecting many countries. Business should also get behind the “decent work” agenda and refrain from hindering labour rights, he said.

Neville Isdell, Chairman and Chief Executive Officer (CEO) of the Coca-Cola Company, said business must become an agent of transformation, since it had the resources, talent and self-interest. It was time to leverage the contribution of business and take action through the Global Compact, which provided the structure and focus for collective action. “Are we a barrier to sustainability, or are we the biggest hope?” he asked. Responsibility was a choice, and the Global Compact allowed business people to make that choice with the world watching. The Coca-Cola Company had committed itself to replacing “every drop of water” it used to make soft drinks.


Also presented at the Summit was the Global Compact’s first annual review, a comprehensive survey that monitors the extent to which companies have implemented the 10 principles. It shows wide adoption of the principles by companies responding to the survey. A majority of respondents have put in place policies relating to human rights, labour conditions, the environment and the fight against corruption. Sixty-three per cent of respondents said they participated in the Global Compact to increase trust in their respective companies.

Global Compact Executive Director Georg Kell said the review also showed that increasing numbers of companies were following the new reporting policy, whereby signatories were expected to disclose annually how they were implementing the 10 principles, or risk de-listing. Some 500 companies had been de-listed last year for repeated failure to communicate on progress, and some 500 others were expected to be de-listed this year.

While companies were accelerating implementation efforts, there were notable “performance gaps”, Mr. Kell said. “For multinationals and other large companies, it is clear that more work needs to be done to embed the principles into subsidiaries and supply chains. By doing so, companies will realize the full benefits of engagement.”

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