INTRODUCTION TO GOOD GOVERNANCE AND SOCIAL RESPONSIBILITY

WHAT   IS   GOOD   GOVERNANCE?

Recently the terms "governance" and "good governance" are being increasingly used in
development literature. Bad governance is being increasingly regarded as one of the root causes
of all evil within our societies. Major donors and international financial institutions are
increasingly basing their aid and loans on the condition that reforms that ensure "good
governance" are undertaken.

GOVERNANCE

The concept of "governance" is not new. It is as old as human civilization. Simply put
"governance" means: the process of decision-making and the process by which decisions are
implemented (or not implemented). Governance can be used in several contexts such as
corporate governance, international governance, national governance and local governance.

Since governance is the process of decision-making and the process by which decisions are
implemented, an analysis of governance focuses on the formal and informal actors involved in
decision-making and implementing the decisions made and the formal and informal structures
that have been set in place to arrive at and implement the decision.

Government is one of the actors in governance. Other actors involved in governance vary
depending on the level of government that is under discussion. In rural areas, for example, other
actors may include influential land lords, associations of peasant farmers, cooperatives, NGOs,
research institutes, religious leaders, finance institutions political parties, the military etc. The
situation in urban areas is much more complex. Figure 1 provides the interconnections between
actors involved in urban governance. At the national level, in addition to the above actors, media,
lobbyists, international donors, multi-national corporations, etc. may play a role in decision-
making or in influencing the decision-making process.

All actors other than government and the military are grouped together as part of the "civil
society." In some countries in addition to the civil society, organized crime syndicates also
influence decision-making, particularly in urban areas and at the national level.

Similarly formal government structures are one means by which decisions are arrived at and
implemented. At the national level, informal decision-making structures, such as "kitchen
cabinets" or informal advisors may exist. In urban areas, organized crime syndicates such as the
"land Mafia" may influence decision-making. In some rural areas locally powerful families may
make or influence decision-making. Such, informal decision-making is often the result of corrupt
practices or leads to corrupt practices.

1
 Click to Enlarge

Figure 1: Urban actors

GOOD GOVERNANCE

Good governance has 8 major characteristics. It is participatory, consensus oriented, accountable,

transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of
law. It assures that corruption is minimized, the views of minorities are taken into account and
that the voices of the most vulnerable in society are heard in decision-making. It is also
responsive to the present and future needs of society.

2
 Figure 2: Characteristics of good governance

Participation

Participation by both men and women is a key cornerstone of good governance. Participation
could be either direct or through legitimate intermediate institutions or representatives. It is
important to point out that representative democracy does not necessarily mean that the concerns
of the most vulnerable in society would be taken into consideration in decision making.
Participation needs to be informed and organized. This means freedom of association and
expression on the one hand and an organized civil society on the other hand.

Rule of law

The rule of law refers to the institutional process of setting, interpreting and implementing laws
and other regulations. It means that decisions taken by government must be founded in law and
that private firms and individuals are protected from arbitrary decisions.

Good governance requires fair legal frameworks that are enforced impartially. It also requires
full protection of human rights, particularly those of minorities. Impartial enforcement of laws
requires an independent judiciary and an impartial and incorruptible police force.

Transparency

Transparency means that decisions taken and their enforcement are done in a manner that
follows rules and regulations. It also means that information is freely available and directly
accessible to those who will be affected by such decisions and their enforcement. It also means
that enough information is provided and that it is provided in easily understandable forms and
media.

Transparency is an important aspect of good governance, and transparent decision making is

critical for the private sector to make sound decisions and investments. Accountability and the
rule of law require openness and good information so higher levels of administration, external
reviewers and the general public can verify performance and compliance to law.

Governments have access to a vast amount of important information. Dissemination of this

information through transparency and open information systems can provide specific information
that firms and individuals need to have to be able to make good decisions. Capital markets
depend for example on information openness.

Responsiveness

Good governance requires that institutions and processes try to serve all stakeholders within a
reasonable timeframe.

Consensus oriented

There are several actors and as many view points in a given society. Good governance requires
mediation of the different interests in society to reach a broad consensus in society on what is in
the best interest of the whole community and how this can be achieved. It also requires a broad
and long-term perspective on what is needed for sustainable human development and how to
achieve the goals of such development. This can only result from an understanding of the
historical, cultural and social contexts of a given society or community.

Equity and inclusiveness

3
A society’s well being depends on ensuring that all its members feel that they have a stake in it
and do not feel excluded from the mainstream of society. This requires all groups, but
particularly the most vulnerable, have opportunities to improve or maintain their well being.

Effectiveness and efficiency

Good governance means that processes and institutions produce results that meet the needs of
society while making the best use of resources at their disposal. The concept of efficiency in the
context of good governance also covers the sustainable use of natural resources and the
protection of the environment.

Accountability

Accountability is a key requirement of good governance. Not only governmental institutions but
also the private sector and civil society organizations must be accountable to the public and to
their institutional stakeholders. Who is accountable to whom varies depending on whether
decisions or actions taken are internal or external to an organization or institution. In general an
organization or an institution is accountable to those who will be affected by its decisions or
actions. Accountability cannot be enforced without transparency and the rule of law.

CONCLUSION

From the above discussion it should be clear that good governance is an ideal which is difficult
to achieve in its totality. Very few countries and societies have come close to achieving good
governance in its totality. However, to ensure sustainable human development, actions must be
taken to work towards this ideal with the aim of making it a reality.

http://www.unescap.org/pdd/prs/ProjectActivities/Ongoing/gg/governance.asp

Ethics

Ethics is considered the moral standards by which people judge behavior. Ethics is often
summed up in what is considered the “golden rule”—do unto others as you would have them do
unto you. In business, there are many different people you have to answer to: customers,
shareholders and clients. Determining what to do when an ethical dilemma arises among these
different interests can be extremely tricky and as such business ethics as a field is complex and
multi-faceted.

Business ethics can be defined as written and unwritten codes of principles and values
that govern decisions and actions within a company. Companies and businesspeople who wish to
thrive long-term must adopt sound ethical decision-making practices. Companies and people
who behave in a socially responsible manner are much more likely to enjoy ultimate success than
those whose actions are motivated solely by profits. In many cases, doing the right thing often
leads to the greatest financial, social, and personal rewards in the long run. (White, Mary
Gormandy, Sundblad, Donna and Finely, Amy)

It is a form of applied ethics that examines ethical rules, theories and principles in
business context. Generally speaking is a normative discipline, whereby particular ethical
standadrds are advocated and then applied. It makes specific judgments about what is right or
wrong, which is to say, it teaches what ought to be done and what ought to be done, (De George,
1999).

4
 Some business ethics are imposed by law. For example, the SEC governs the way
investment bankers and stock brokers do business, and court rules dealing with attorney client
privilege dictate some ethical decisions for attorneys. However, there are also business decisions
that do not fall within the guidelines of the law, in which ethical or moral judgments must be
made. www.yourdictionary.com

An ethical approach is becoming necessary both for corporate success and a positive
corporate image. Following pressure from consumers for more ethical and responsible business
practices, many organizations are choosing to make a public commitment to ethical business by
formulating codes of conduct and operating principles. In doing so, they must translate into
action the concepts of personal and corporate accountability, corporate giving, corporate
governance, and whistle blowing. dictionary.bnet.com

Ethics sets standards as to what is good or bad in conduct and decision making. Ethics
deals with internal values that are a part of corporate culture and shapes decisions concerning
social responsibility with respect to the external environment.

Criteria of Ethical Decision Making

1. Utilitarian Approach – It holds that moral behavior produces the greatest good for the
greatest number. A decision maker is expected to consider the effect of each decision alternative
on all parties and select the one that optimizes the satisfaction for the greatest number of people.

2. Individualism Approach – Contends that acts are moral when they promote the individual’s
best long-term interests. Individual self-direction is paramount, and external forces that restrict
self-direction should be severely limited.

3. Moral – rights Approach – asserts that human beings have fundamental rights and liberties
that cannot be taken away by an individual’s decision.

Six Moral Rights should be considered during decision making.

1. The right of free consent

2. The right to privacy

3. The right of freedom of conscience

4. The right of free speech

5. The right to due process

6. The right to life and safety

4. Justice Approach – Holds that moral decisions must be based on standards of equity, fairness,
and impartiality.

Three Types of Justice

1. Distributive justice – requires that different treatment of people not be based on

arbitrary characteristics.

2. Procedural justice – requires that rules be administered fairly.

5
 3. Compensatory justice – argues that individuals should be compensated for the cost of
their injuries by the party responsible.

Some Reasons for Unethical Behavior

1. Moral Relativism – claims that morality is relative to some personal, social, or cultural
standard and that there is no method for deciding whether one decision is better than the other.

2. Kohlberg’s Levels of Moral Development – a person’s ethical behavior is affected by his

level of moral development, certain personality variables, and such situational factors as the job
itself, the supervisor, and the organizational culture.

Kohlberg’s Three Levels of Moral Development

1. The pre-conventional level – is characterized by a concern for self.

2. The conventional level – is characterized by considerations of society’s laws and norms.

3. The principled level – is characterized by a person’s adherence to an internal moral code.

Corporate social responsibility

Corporate social responsibility (CSR), also known as corporate responsibility,

corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate
social performance, is a form of corporate self-regulation integrated into a business model.
Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business
would monitor and ensure its adherence to law, ethical standards, and international norms.
Business would embrace responsibility for the impact of their activities on the environment,
consumers, employees, communities, stakeholders and all other members of the public sphere.
Furthermore, business would proactively promote the public interest by encouraging community
growth and development, and voluntarily eliminating practices that harm the public sphere,
regardless of legality. Essentially, CSR is the deliberate inclusion of public interest into
corporate decision making, and the honoring of a triple bottom line: People, Planet, and Profit.
(Wikipedia)

Corporate social responsibility (CSR) can be defined as the "economic, legal, ethical,
and discretionary expectations that society has of organizations at a given point in time" (Carroll
and Buchholtz 2003, p. 36). (www.uitp.com)

Corporate social responsibility is related to, but not identical with, business ethics. While
CSR encompasses the economic, legal, ethical, and discretionary responsibilities of
organizations, business ethics usually focuses on the moral judgments and behavior of
individuals and groups within organizations. Thus, the study of business ethics may be regarded
as a component of the larger study of corporate social responsibility. (www.uitp.com)

CSR is often used to promote voluntary corporate initiatives, as an alternative to

additional or existing mandatory regulations. The International Chamber of Commerce has
aggressively promoted a standards-free concept of "corporate responsibility" that enables
companies to proclaim their "responsibility" without necessitating companies to meet minimum
standards.

6
 Corporate social responsibility (CSR) promotes a vision of business accountability to a
wide range of stakeholders, besides shareholders and investors. Key areas of concern are
environmental protection and the wellbeing of employees, the community and civil society in
general, both now and in the future.

Some of the drivers pushing business towards CSR include:

1. The shrinking role of government

In the past, governments have relied on legislation and regulation to deliver social and
environmental objectives in the business sector. Shrinking government resources, coupled with a
distrust of regulations, has led to the exploration of voluntary and non-regulatory initiatives
instead.

2. Demands for greater disclosure

There is a growing demand for corporate disclosure from stakeholders, including customers,
suppliers, employees, communities, investors, and activist organizations.

3. Increased customer interest

There is evidence that the ethical conduct of companies exerts a growing influence on the
purchasing decisions of customers. In a recent survey by Environics international, more than one
in five consumers reported having either rewarded or punished companies based on their
perceived social performance.

4. Growing investor pressure

Investors are changing the way they assess companies' performance, and are making decisions
based on criteria that include ethical concerns.

5. Competitive labor markets

Employees are increasingly looking beyond paychecks and benefits, and seeking out employers
whose philosophies and operating practices match their own principles. In order to hire and
retain skilled employees, companies are being forced to improve working conditions.

6. Supplier relations

As stakeholders are becoming increasingly interested in business affairs, many

companies are taking steps to ensure that their partners conduct themselves in a socially
responsible manner. Some are introducing codes of conduct for their suppliers, to ensure that
other companies' policies or practices do not tarnish their reputation.

Some of the positive outcomes that can arise when businesses adopt a policy of social
responsibility include:

1. Company benefits:

Improved financial performance;

Lower operating costs;

Enhanced brand image and reputation;

Increased sales and customer loyalty;

7
Greater productivity and quality;

More ability to attract and retain employees;

Reduced regulatory oversight;

Access to capital;

Workforce diversity;

Product safety and decreased liability.

2. Benefits to the community and the general public:

Charitable contributions;

Employee volunteer programs;

Corporate involvement in community education, employment and homelessness programs;

Product safety and quality.

3. Environmental benefits:

Greater material recyclability;

Better product durability and functionality;

Greater use of renewable resources;

Integration of environmental management tools into business plans, including life-cycle

assessment and costing, environmental management standards, and eco-labeling.

Criteria in Evaluating Corporate Social Responsibility

1. Economic Responsibilities – its responsibility is to produce the goods and services

that society wants and to maximize profits for its owners and shareholders.

2. Legal Responsibilities – businesses are expected to fulfill their economic goals

within the legal framework. Legal responsibility defines what society deems as important
with respect to appropriate corporate behavior.

3. Ethical Responsibilities – includes behaviors that are not necessarily codified into
law and may not serve the corporation’s direct economic interests. Organization decision
makers should act with equity, fairness, and impartiality, respect the rights of individuals
and provide different treatment of individuals only when relevant to the organization’s
goals and tasks.

4. Discretionary Responsibilities – is purely voluntary and is guided by a company’s

desire to make social contributions not mandated by economics, law or ethics.

Arguments for and Against Social Responsibility

Arguments for:

1. Public expectation – public opinion now supports business’s pursuing social as well as
economic goals.

8
2. Long-run profits – this is the normal results of the better community relations and improved
business image that responsible behavior brings.

3. Ethical obligation – businesses should be socially responsible because responsible actions are
right for their own sake.

4. Public image – firms seek to enhance their public image to get increased sales, better
employees, access to financing, and other benefits.

5. Better environment – business involvement can help solve difficult social problems helping
create a better quality of life and a more desirable community in which to attract and keep skilled
employees.

6. Discouragement of further governmental regulations – governmental a regulation adds

economic costs and restricts managers’ decision flexibility.

7. Balance of responsibility and power – business holds a large amount of power in society.

8. Stockholders’ interests- social responsibility will improve a business’s stock price in the long
run.

9. Possession of resources – business organizations has the financial resources, technical

experts, and managerial talent to support public and charitable projects that need assistance.

10. Superiority of prevention over cures – social problems must be addressed at some time.
Business should act before these problems become serious and costly to correct, taking
managers’ energies away from accomplishing their goal of producing goods and services.

Arguments Against:

1. Violation of profit maximization – business is being socially responsible when it attends

strictly to its economic interests and leaves other activities to other institutions.

2. Dilution of purpose – the pursuit of social goals dilutes business’s primary purpose;
economic productivity.

3. Costs – Business must absorb the costs or pass them on to consumers through higher prices.

4. Too much power – if it pursues social goals, it will have even more power.

5. Lack of skills – The outlook and abilities of business leaders are oriented primarily toward
economics.

6. Lack of accountability – There are no direct lines of social accountability from the business
sector to the public.

Approaches to Meeting Social Responsibilities

1. Incorporate social goals into the annual planning process.

2. Seeks comparative industry norms for social programs.

3. Presents reports to organization members, the board of directors, and stockholders on social
responsibility progress.

4. Experiments with different approaches for measuring social performance.

9
5. Attempts to measure cost of social programs as well as the return on social program
investments.

Areas of Measurement

1. The economic function area – this measurement give some indication of the economic
contribution the organization is making to society. Whether the organization is performing such
activities as producing goods and services that people need, creating jobs for society, paying fair
wages, and ensuring worker safety.

2. The quality-of-life area – should focus on producing high-quality goods, dealing fairly with
employees and customers, and making an effort to preserve the natural environment.

3. The social investment area – the organization could be involved in assisting community
organizations dedicated to education, charities, and the arts.

4. The problem-solving area – should focus on the degree to which the organization deals with
social problems, such as participating in long-range community planning and conducting studies
to pinpoint social problems.

Human resources

A CSR program can be an aid to recruitment and retention, particularly within the
competitive graduate student market. Potential recruits often ask about a firm's CSR policy
during an interview, and having a comprehensive policy can give an advantage. CSR can also
help improve the perception of a company among its staff, particularly when staff can become
involved through payroll giving, fund raising activities or community volunteering.

Risk management

Managing risk is a central part of many corporate strategies. Reputations that take
decades to build up can be ruined in hours through incidents such as corruption scandals or
environmental accidents. These can also draw unwanted attention from regulators, courts,
governments and media. Building a genuine culture of 'doing the right thing' within a corporation
can offset these risks.

Brand differentiation

In crowded marketplaces, companies strive for a unique selling proposition that can
separate them from the competition in the minds of consumers. CSR can play a role in building
customer loyalty based on distinctive ethical values. Business service organizations can benefit
too from building a reputation for integrity and best practice.

As corporations pursue growth through globalization, they have encountered new

challenges that impose limits to their growth and potential profits. Government regulations,
tariffs, environmental restrictions and varying standards of what constitutes labor exploitation are
problems that can cost organizations millions of dollars. Some companies use CSR
methodologies as a strategic tactic to gain public support for their presence in global markets,
helping them sustain a competitive advantage by using their social contributions to provide a
subconscious level of advertising. (Fry, Keim, Meiners 1986, 105) Global competition places
particular pressure on multinational corporations to examine not only their own labor practices,
but those of their entire supply chain, from a CSR perspective.

THE STAKEHOLDER CONCEPT

10
 According to Post, Lawrence, and Weber, stakeholders are individuals and groups that
are affected by an organization's policies, procedures, and actions. A "stake" implies that one has
an interest or share in the organization and its operations, per Carroll and Buchholtz. Some
stakeholders, such as employees and owners, may have specific legal rights and expectations in
regard to the organization's operations. Other stakeholders may not have specific rights granted
by law, but may perceive that they have moral rights related to the organization's operations. For
example, an environmental group may not have a legal right in regard to a company's use of
natural resources, but may believe that they have a moral right to question the firm's
environmental policies and to lobby the organization to develop environmentally friendly
policies.

Primary stakeholders have some direct interest or stake in the organization. Secondary
stakeholders, in contrast, are public or special interest groups that do not have a direct stake in
the organization but are still affected by its operations.

The owners of a firm are among the primary stakeholders of the firm. An organization
has legal and moral obligations to its owners. These obligations include, but are not limited to,
attempting to ensure that owners receive an adequate return on their investment. Employees are
also primary stakeholders who have both legal and moral claims on the organization.
Organizations also have specific responsibilities to their customers in terms of producing and
marketing goods and services that offer functionality, safety, and value; to local communities,
which can be greatly affected by the actions of resident organizations and thus have a direct stake
in their operations; and to the other companies with whom they do business. Many social
commentators also suggest that companies have a direct responsibility to future generations and
to the natural environment.

An organization's responsibilities are not limited to primary stakeholders. Although

governmental bodies and regulatory agencies do not usually have ownership stakes in companies
in free-market economies, they do play an active role in trying to ensure that organizations
accept and meet their responsibilities to primary stakeholder groups. Organizations are
accountable to these secondary stakeholders. Organizations must also contend with civic and
special interest groups that purport to act on behalf of a wide variety of constituencies. Trade
associations and industry groups are also affected by an organization's actions and its reputation.
The media reports on and investigates the actions of many companies, particularly large
organizations, and most companies accept that they must contend with and effectively "manage"
their relationship with the media. Finally, even an organization's competitors can be considered
secondary stakeholders, as they are obviously affected by organizational actions. For example,
one might argue that organizations have a social responsibility to compete in the marketplace in
a manner that is consistent with the law and with the best practices of their industry, so that all
competitors will have a fair chance to succeed.

ENVIRONMENTAL ISSUES

Corporations have long been criticized for their negative effect on the natural
environment in terms of wasting natural resources and contributing to environmental problems
such as pollution and global warming. The use of fossil fuels is thought to contribute to global
warming, and there is both governmental and societal pressure on corporations to adhere to
stricter environmental standards and to voluntarily change production processes in order to do
less harm to the environment. Other issues related to the natural environment include waste
disposal, deforestation, acid rain, and land degradation. It is likely that corporate responsibilities
in this area will increase in the coming years.

11
GLOBAL ISSUES

Corporations increasingly operate in a global environment. The globalization of business

appears to be an irreversible trend, but there are many opponents to it. Critics suggest that
globalization leads to the exploitation of developing nations and workers, destruction of the
environment, and increased human rights abuses. They also argue that globalization primarily
benefits the wealthy and widens the gap between the rich and the poor. Proponents of
globalization argue that open markets lead to increased standards of living for everyone, higher
wages for workers worldwide, and economic development in impoverished nations. Many large
corporations are multinational in scope and will continue to face legal, social, and ethical issues
brought on by the increasing globalization of business.

TECHNOLOGY ISSUES

Another contemporary social issue relates to technology and its effect on society. For
example, the Internet has opened up many new avenues for marketing goods and services, but
has also opened up the possibility of abuse by corporations. Issues of privacy and the security of
confidential information must be addressed. Biotechnology companies face questions related to
the use of embryonic stem cells, genetic engineering, and cloning. All of these issues have far-
reaching societal and ethical implications. As our technological capabilities continue to advance,
it is likely that the responsibilities of corporations in this area will increase dramatically.

The Emergence of Corporate Social Responsibility

Heightened corporate attention to CSR has not been entirely voluntary. Many companies
awoke to it only after being surprised by public responses to issues they had not previously
thought were part of their business responsibilities. Nike, for example, faced an extensive
consumer boycott after the New York Times and other media outlets reported abusive labor
practices at some of its Indonesian suppliers in the early 1990s. Shell Oil’s decision to sink the
Brent Spar, an obsolete oil rig, in the North Sea led to Greenpeace protests in 1995 and to
international headlines. Pharmaceutical companies discovered that they were expected to
respond to the AIDS pandemic in Africa even though it was far removed from their primary
product lines and markets. Fast-food and packaged food companies are now being held
responsible for obesity and poor nutrition.

Debates about CSR have moved all the way into corporate boardrooms. In 2005, 360
different CSR-related shareholder resolutions were filed on issues ranging from labor conditions
to global warming. Government regulation increasingly mandates social responsibility reporting.
Pending legislation in the UK, for example, would require every publicly listed company to
disclose ethical, social, and environmental risks in its annual report. These pressures clearly
demonstrate the extent to which external stakeholders are seeking to hold companies accountable
for social issues and highlight the potentially large financial risks for any firm whose conduct is
deemed unacceptable.

While businesses have awakened to these risks, they are much less clear on what to do
about them. In fact, the most common corporate response has been neither strategic nor
operational but cosmetic: public relations and media campaigns, the centerpieces of which are
often glossy CSR reports that showcase companies’ social and environmental good deeds. Of the
250 largest multinational corporations, 64% published CSR reports in 2005, either within their
annual report or, for most, in separate sustainability reports—supporting a new cottage industry
of report writers.

12
How Corporate Responsibility Can Survive the Recession

Corporations engaged in recession-driven cost-cutting are trimming or eliminating corporate

responsibility initiatives. Though corporate survival is key and consumer skepticism of business
CR initiatives at an all-time high, such actions are short-sighted. Now more than ever, businesses
need to be saying "yes" rather than "no" to their social responsibilities. There are five key
reasons:

1. Critical cross-border global issues require multinational corporations and their CEOs to lead in
the search for solutions, recession or not.

2. Recession results in more poverty and exacerbates problems that national governments and
NGOs alone cannot solve.

3. The global economic crisis has increased distrust of business. Corporations with a strong
commitment to CR are better able to withstand the downdraft and put the brakes on increased
regulation.

4. Employees are attracted to and motivated to stay with socially responsible companies and
want to see commitment to CR initiatives continue through tough times.

5. An increasing proportion of consumers are willing to pay price premiums for products and
services marketed by companies with proven and sustained track records of doing good.

Despite these arguments, the pressure for CR cost cuts in the face of recession is often
inescapable. But the companies most vulnerable to cuts are those that have not embraced and
embedded CR in their corporate DNA. There are four progressive levels of CR commitment:

First, there are companies that see CR only in terms of corporate philanthropy. They find
it relatively easy to cut their annual donations.

Second, there are companies that have integrated support for a social cause into their
marketing programs. They are less likely to let go, as their brand equities have become entwined
with particular causes. For example, the American Express Red card donates a percentage of the
value of card member purchases to the fight against AIDS.

A third level of engagement finds CR considerations embedded in a company's daily

operations. Qualifying suppliers, for example, might be required to comply with environmental
and labor practice standards. Starbucks has long purchased more fair trade coffee than any other
company in the world, while Wal-Mart has moved rapidly in recent years to catch up in its
operational commitment to CR.

Fourth and finally, there are companies that have internalized CR values into their
corporate cultures, mission statements and daily decision-making. The Johnson & Johnson credo
puts the interests of customers, employees and community ahead of those of shareholders. In the
words of former CEO James Burke, doing so "insures that the interests of all stakeholders are
maximized."

The further along this CR continuum a company is, the less likely it is to trim its CR
commitment in the face of an economic downturn. In fact, some companies are finding that
pursuing environmental CR initiatives during this recession is helping them to cut costs and
increase their CR budget without changing prices. Cadbury, for example, has lowered its energy
input costs and invested the savings in a commitment to buying only fair trade cocoa.

13
 A growing segment of consumers worldwide considers CR evaluations important in
selecting among brands across a wide range of categories. In previous recessions, this segment
typically shrank rapidly in size as price considerations became paramount. But, thanks to
heightened public awareness of issues like global warming, CR concerns are now more deeply
and broadly embedded in the consumer psyche. CR is increasingly a mainstream consumer
concern, no longer the province of a wealthy niche.

Regardless of recession, some cutting-edge companies are capitalizing on the growing

consumer interest in CR to both do well and differentiate themselves at the same time. The UK-
based global retailer, Tesco PLC, has taken the lead in promoting its Sustainable Consumption
Initiative, now being copied by Wal-Mart. Tesco plans to require carbon footprint information to
be placed on the label of every product sold in its stores. Terry Leahy, Tesco's CEO, wants to
make it easy for consumers to incorporate environmental impact criteria in their purchasing. As
he says: "To achieve a mass movement in green consumption is to empower everyone, not just
the enlightened or the affluent." Corporations cannot change the world on their own. They need
to empower their customers to help change the world for themselves.

CEO leadership, such as Terry Leahy is providing, is essential for corporate CR

commitments not merely to survive but to advance during the economic downturn. As David
Gergen has stated: "More CEOs need to sign up as reformers."

Research suggests that those corporations that develop a reputation as being socially
responsive and ethical enjoy higher levels of performance. However, the ultimate motivation for
corporations to practice social responsibility should not be a financial motivation, but a moral
and ethical one.

Different organizations have framed different definitions - although there is considerable

common ground between them. The definition used by Business Respect since 2001: CSR is
about how companies manage the business processes to produce an overall positive impact
on society. - Mallen Baker, Founding Director, Business Respect.

14
 Companies need to answer two aspects of their operations. 1. The quality of their
management - both in terms of people and processes (the inner circle). 2. The nature of, and
quantity of their impact on society in the various areas.

Outside stakeholders are taking an increasing interest in the activity of the company.
Most look to the outer circle - what the company has actually done, good or bad, in terms of its
products and services, in terms of its impact on the environment and on local communities, or in
how it treats and develops its workforce. Out of the various stakeholders, it is financial analysts
who are predominantly focused - as well as past financial performance - on quality of
management as an indicator of likely future performance.

The World Business Council for Sustainable Development in its publication "Making
Good Business Sense" by Lord Holme and Richard Watts, used the following definition.
"Corporate Social Responsibility is the continuing commitment by business to behave
ethically and contribute to economic development while improving the quality of life of the
workforce and their families as well as of the local community and society at large"

The same report gave some evidence of the different perceptions of what this should
mean from a number of different societies across the world. Definitions as different as "CSR is
about capacity building for sustainable livelihoods. It respects cultural differences and finds
the business opportunities in building the skills of employees, the community and the
government" from Ghana, through to "CSR is about business giving back to society" from the
Philippines.

For instance, the CSR definition used by Business for Social Responsibility is:
"Operating a business in a manner that meets or exceeds the ethical, legal, commercial and
public expectations that society has of business”.

On the other hand, the European Commission hedges its bets with two definitions
wrapped into one: "A concept whereby companies decide voluntarily to contribute to a better
society and a cleaner environment. A concept whereby companies integrate social and
environmental concerns in their business operations and in their interaction with their
stakeholders on a voluntary basis".

When you review each of these, they broadly agree that the definition now focuses on the
impact of how you manage your core business. Some go further than others in prescribing how
far companies go beyond managing their own impact into the terrain of acting specifically
outside of that focus to make a contribution to the achievement of broader societal goals. It is a
key difference, when many business leaders feel that their companies are ill equipped to pursue
broader societal goals, and activists argue that companies have no democratic legitimacy to take
such roles. That particular debate will continue.

San Miguel Corporation Inc.

Doing business is about having a harmonious and long-lasting relationship with

customers. Corporate Social Responsibility extends this relationship to other stakeholders such
as the communities where these corporations operate. It is no longer the battle cry of
corporations to simply make profit for its stockholders.

Now, more than ever, corporations are guided by values from which it bases its every
business decision.

15
 For San Miguel Corporation, integrity, teamwork, respect for others and social
responsibility are just a few of its corporate values that guide them every day. Through its
corporate social responsibility arm, San Miguel Foundation Incorporated, San Miguel
Corporation proactively reaches out to others to bring forth change that will enable communities
to live better lives.

San Miguel Foundation, Inc. has crafted various programs and projects that address
contemporary issues on livelihood, health, education, the environment and disaster relief
following its overall direction of Enterprise, Education and the Environment.

A Commitment to Social Responsibility Social issues permeates almost all aspects of

business. How a corporation manages such issues has much to do with how seriously it takes its
social responsibility to heart.

The San Miguel Group's corporate citizenship goes beyond its commitment to its consumers,
employees, and key stakeholders in government and the communities where it operates. Past and
current programs focus on specific projects where it makes a difference.

Our Core Values

Passion for Success

We will constantly strive for excellence. We will be the best we can be and create value
in everything we do. We will be proactive and entrepreneurial, propelled by a sense of urgency,
competitiveness and total dedication to results.

Teamwork

With trust and respect for each other and with unity and purpose, we will work toward
our shared aspirations, transcending boundaries along functional and organizational lines.

Respect for our People

We recognize our employees as individuals and are committed to nurturing their

individual capabilities. We will uplift the dignity of labor by encouraging our people to be the
best in their fields. We are committed to creating a work environment that encourages open
communication, camaraderie and professional growth.

Customer Focus

We will be our customers’ preferred choice. They will choose our products and services
above others because we provide them with products and services that exceed their expectations.

Innovativeness

We will encourage creativity and ingenuity in our processes and systems, products and
services. We will be forever looking for ways to outdo ourselves, always striving to be the first
to anticipate consumer needs and deliver something better.

16
Integrity

In the conduct of our business, we will be guided by what is ethical, fair and right. We
believe in profit with honor and are committed to good governance and the highest moral
standards.

Social Responsibility

We believe social responsibility and corporate citizenship are integral parts of our
business. We are committed to improving lives of people in the communities where we live and
work.

Community and Enterprise Development

These are projects have active community involvement and are implemented with the
objective of benefiting a larger number of people. This includes medical missions, community
clinics, barangay strengthening and enterprise development.

Education

San Miguel Foundation supports literacy in the Philippines through scholarship assistance,
supplemental feeding, book donation and functional literacy programs.

Environmental and other programs

The environmental program of San Miguel Foundation Inc. covers the protection of land,
water, and air. On a smaller scale, the Foundation conducts tree-planting projects on areas
identified by different San Miguel Corporation (SMC) plants. Tree-planting projects are usually
scheduled to coincide with plant celebrations.

The Foundation advocates the protection of coastal waters through its Coastal Resource
Management, which engages in mangrove reforestation, artificial reef installation and
regeneration of marine resources. Training on waste management and donation of trash bins
through plant facilities are also conducted.

Disaster Management

This project includes relief distribution to calamity stricken areas and rehabilitation
activities such as provision of livelihood projects and repairs of school buildings and day care
centers.

San Miguel Business Units play an active role as well as the employees who answer the
call for fund raising campaigns.

Local Consumer Activities

These are marketing and Sales projects to support their operation either in areas where
SMC have a stronghold or in areas where they want to establish their position.

In the study conducted by Porter and Kramer (December 2006) entitled the Link between
Competitive Advantage and Corporate social Responsibility they found out that governments,
activists, and the media have become adept at holding companies to account for the social
17
consequences of their activities. Myriad organizations rank companies on the performance of
their corporate social responsibility (CSR), and, despite sometimes questionable methodologies,
these rankings attract considerable publicity. As a result, CSR has emerged as an inescapable
priority for business leaders in every country.

Many companies have already done much to improve the social and environmental
consequences of their activities, yet these efforts have not been nearly as productive as they
could be—for two reasons. First, they pit business against society, when clearly the two are
interdependent. Second, they pressure companies to think of corporate social responsibility in
generic ways instead of in the way most appropriate to each firm’s strategy.

The fact is, the prevailing approaches to CSR are so fragmented and so disconnected
from business and strategy as to obscure many of the greatest opportunities for companies to
benefit society. If, instead, corporations were to analyze their prospects for social responsibility
using the same frameworks that guide their core business choices, they would discover that CSR
can be much more than a cost, a constraint, or a charitable deed—it can be a source of
opportunity, innovation, and competitive advantage.

The study conducted by Falck and Heblich entitled Corporate Social Responsibility:
Doing Well by Doing good) mentioned that by strategically practicing corporate social
responsibility (CSR), a company can 'do well by doing good'; in other words, it can make a profit
and make the world a better place at the same time. CSR is regarded as voluntary corporate
commitment to exceed the explicit and implicit obligations imposed on a company by society's
expectations of conventional corporate behavior. Hence, CSR is a way of promoting beneficial
social trends in order to enhance society's basic order, which we define as consisting of
obligations that cover both the legal framework and social conventions. Due to globalization,
companies are now less constrained by society's basic order than they have been in the past.

18