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cating effectively with stakeholders. Business partners, suppliers, customers,
employees, financiers and governmental organisations want to hear that the
organisation™s risks are understood and effectively managed. This should occur
at a number of levels of engagement, including internal marketing. However, at
present large companies use their annual report to convey their progress. A stake-
holder analysis model is reviewed in Chapter 9.


Social and business ethical risks
An overview of the risk issues
Analysis indicates that indirect social, cultural and ethical risks are more of a
financial threat to organisations than direct risks, at 5.1% (of net risk to value):
The average exposure to social and ethical risk for the top 500 EU and US
companies is 5.1% of market capitalisation (the net risk); and
This risk exposure has been reduced from 9.0% of market value by good risk
management techniques (the risk reduction/management factor).


Categories of social, cultural and ethical risks
The chart below shows the total social and ethical risks broken down by
category.

Human Rights
Community
(external),
Investment,
0.3%
0.3%
Health “ Historic
Liabilities, 1.2%
Health External
(public), 0.4%


Safety Internal
(workforce),
Safety External
0.5%
(public), 1%
Human
Rights/Resources
Health Internal
(internal), 0.7%
(workforce),
0.7%



The following table shows the social, cultural and ethical risk categories by
net risk to value.
Chapter 12 “ Social and business ethic risk overview 281




Social and ethical risk Gross Net Covered
(inherent) (residual) in
risk risk to value

Community investment/involvement 0.70% 0.3% Chapter 12
Cultural risk Not available Not available Chapter 13
Human rights/resources (internal) 1.20% 0.7% Chapter 14
Human rights (external) 0.40% 0.3% Chapter 15
Health internal (workforce) 1.50% 0.7% Chapter 16
Safety internal (workforce) 1.10% 0.5% Chapter 16
Health external (public) 0.60% 0.4% Chapter 17
Safety external (public) 1.60% 1.0% Chapter 17
Health and safety “ historic liabilities 1.90% 1.2% Chapter 17
Total 9% 5.1%




A breakdown of the social and ethical risks by issue raises some interesting
observations, with the highest risk seen to be those that are historic health and
safety issues incorporating a large element of product liability issues at 1.2% of
market value. The second highest risk issue, the safety of the public and cus-
tomers, has increased in potential impact upon organisations and also involves
product liability and safety issues, as well as protection from acts of vandalism
and terrorism. Other risks that are external to the organisation in nature are
community investment and involvement issues at 0.3% of value as are external
human rights.
Risks internal to organisations are of a high impact with internal human
rights issues and internal workforce health issues both being a 0.7% average risk
to value, with staff safety issues accounting for a 0.5% of organisational value.
Risk categories that have an ethical perspective but are covered in the eco-
nomic risk section of the book are: the unrestrained use of corporate power;
illegal activities like economic crime, bribery and corruption; as well as the
often contentious use of technology, like animal testing (which certain ele-
ments of society deem unethical while others approve as a necessity).


Social and ethical risk overview by sector
The graph below indicates the sectors with the highest net risk from social and
ethical issues.
An initial consideration is that there are few companies that comprise the
steel sector in this study, so the results are skewed. The pharmaceutical risk
largely lies in the countries in which the main companies are operating, and
also the nature of their products “ profiting from treating illnesses that many
observers believe should be done on a not-for-profit basis, animal testing, prod-
uct trials and recalls. The counterbalance to this is that their products could
also be said to have a large ethical impact as well, preventing deaths and reliev-
ing pain and suffering. The aerospace and defence sector is a sector which a lot
of people object to on ethical grounds as it profits from making products that
Part C “ Overview of the Social Aspects of Business Risks
282



Social & Ethical Combined
10.0%

9.0%
STEEL & OTHER METALS
8.0%
PHARMACEUTICALS &
BIOTECH
7.0%
Net (Residual) Risk




AEROSPACE & DEFENCE
6.0%
OIL & GAS
5.0%
TOBACCO
4.0%
TRANSPORT
3.0%
SECTORS
2.0%
FTSE 350 AVERAGE
1.0%

0.0%
0.0% 5.0% 10.0% 15.0% 20.0%
Gross (Inherent) Risk




are designed to kill; there is little recognition of the separation of products used
for defence and those used for offensive purposes. The oil and gas sector is
often located in areas of turmoil and conflict and this can leave these compa-
nies with great ethical dilemmas that are well covered by the media.


Analysis of social, cultural and ethical risks
Community involvement/investment risks
As a result of SERM research, the following results were obtained:

Lack of community involvement risk is 0.3% of market value for the top 500
EU and US companies; and
This risk exposure has been reduced from 0.7% of market value by good risk
management techniques (the risk reduction/management factor).

Companies benefit from the society in which they operate and as such are
expected to make contributions to its development. This is often also referred
to as the licence to operate. Companies that repatriate all their profits back to an
external country are more likely to be viewed negatively, and be subject to
labour unrest and consumer boycotts. The benefits of programmes related to
community investment (CI) or cause related marketing (CRM) can be substan-
tial, and not just from the perspective of reducing risks and negative news
Chapter 12 “ Social and business ethic risk overview 283



potential. An example of how stakeholders can view organisations™ positive
community investment activities can be seen by the following quote from UK
Prime Minister, the Rt Hon. Tony Blair MP:

Your involvement in the communities in which you do business is more than an act of
charity. Involvement in the community is about giving better definition to the purposes
and practices of business in the modern world.

Cause related marketing and other community-related marketing activities are
discussed in Chapter 10.
Evidence of the following community involvement can be seen as positive:

Dialogue with community stakeholders;
Work placement schemes for local youth;
Preferential employment for local community;
Annual time allowance for employee involvement in charity or community
schemes;
Regular donations to charity, civil society and other groups;
The economic benefits of job creation and training; and
The protection of the indigenous cultures of work locations.

The following graph shows the social and ethical risk (net) from lack of
community involvement by sector.




Community Involvement
0.9%

0.8%

0.7%
STEEL & OTHER METALS
AEROSPACE & DEFENCE
Net (Residual) Risk




0.6%
TOBACCO
0.5% OIL & GAS
MINING
0.4%
TRANSPORT
0.3% SECTORS
FTSE 350 AVERAGE
0.2%

0.1%

0.0%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
Gross (Inherent) Risk
Part C “ Overview of the Social Aspects of Business Risks
284



Case studies
Community involvement/investment risks
Positive case studies include any examples of organisations engaging in
community investment:
The London Benchmarking Group (LBG) is a group of over 100 companies
around the world who have developed a model to corporate community
investment (CCI). Members include multinationals such as HSBC, Vodafone
and Turner Broadcasting, as well as major local companies in several coun-
tries (see http://www.lbg-online.net). They work together to:
Benchmark and share best practice;
Develop and refine measurement tools; and
Improve management and implementation of CCI projects.
Brewer and soft drinks firm SAB Miller™s research identified a local crop,
sorghum, as suitable for brewing good quality beer. However, poor farming
techniques and undeveloped infrastructure meant that supply levels were
low and of poor quality. Therefore, SAB Miller subsidiary, Nile Breweries,
created a programme offering technical assistance and finance to small-scale
producers. After several years of investment and nurture, this has created a
stable supply base of more than 3500 Ugandan local farmers. The result is
that Eagle Lager is Nile Breweries™ most successful brand, farmers and their
families have more sustainable livelihoods, and local communities enjoy a
positive knock-on effect of more jobs and spending power;
Cadbury Schweppes runs the WaterAid partnership aimed at improving
access to safe water in Ghana. Evaluation has shown measurable impacts
which include freeing up time for work and a reduction in health costs;
Diageo, the UK drinks group, has run a programme for 10 years called
Tomorrow™s People. A recent evaluation of Tomorrow™s People showed that by
helping more than 380 000 people out of long-term unemployment, it saved
the UK economy around £450 m through benefits payments saved, additional
tax receipts, reduction in health expenditure and reduction in crime;
Help the Aged in Wales has a list of firms they say are promoting age-positive
policies. Locally, they include Asda, B&Q, Marks and Spencer, Safeway,
Sainsbury, Tesco and Westbury Homes (South Wales Evening Post, 26
January 2004, p. 15);
David Wilson Homes provided £70 000 so that traffic calming could be intro-
duced on roads in a village where they were planning a housing development
(Leicester Mercury, 14 February 2002, p. 7);
Wilson Bowden has trained children close to their developments to stay off
building sites as part of a safety initiative. David Wilson Homes have also
produced a safety booklet to educate children of all ages about the serious-
ness and consequences of playing in an active building area (Liverpool Echo,

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