Remarks by Daniel Litvin Founder and Principal Consultant, Percept Risk and Strategy Ltd.
Global Business and Global Poverty Conference
Stanford Graduate School of Business
It really is an honor to be invited to address this important conference, which you know is titled Global Business and Global Poverty. And I have to say the lineup of speakers today is really very illustrious and impressive.
The captains of industry who are speaking, who control the tens of billions of dollars of capital, are clearly representatives of global business. Quite how I fit in I am little less sure about as an independent writer and also a director of a company with tiny revenues compared with say BP or Agilent. I'd be a little bit happier if I'd been invited more as a representative of global policy, than a global business. But, putting that to one side, it is indeed a honor to be here. I am going to attempt to provide a historical context to the discussions today, focusing in particular on the book I have written in this area: Empires of Profit.
One of the really big questions for today's conference is whether and how a business can contribute to reducing global poverty or rather is business in fact part of the problem of global poverty. That's of course the major ideological divide between those who support globalization and the anti-globalization movement. However, it is such a big and well-discussed question that I am actually going to duck it. What I want to examine instead from a historical prospective is whether multi-national companies are actually effective in their own terms managing social and political issues when they invest in poorer parts of the world. In other words whether or not big businesses is good or bad for poverty and how effective companies are in managing the social and political context in which they operate.
I think something of a myth has grown up that big companies are all powerful and controlling when they invest in developing countries; that they cleverly manipulate governments and societies in their own interest. Companies themselves have partially helped to propagate this myth because they like to give the impression, particularly to shareholders, that they are in control and that they know what they are doing. It is also, of course, a myth put about by many in the anti-globalization movement who see multi-national companies as a source of vast power in the developing world.
In Empires of Profit my book examines in detail the political maneuverings and imaginations of ten of the most powerful western multi-national companies operating in poorer parts of the world through history. It starts with the East India Company and concludes with various modern day examples, such as Shell in Nigeria and also Rupert Murdoch, a growing TV interest in China and India. And just to elaborate a little on Professor McMillian's introduction, it may help explain where I'm coming from in my research to give you a little bit more background about myself.
I used to be a journalist covering environment and resource issues at The Economist and writing a lot about the behavior and misbehavior of large firms. I was in house at a large company, Rio Tinto, the London based multi-national where I, for example, wrote the human-rights and anti corruption policies. The consultancy company I now run, Percept Risk and Strategy, specializes in advising multi-nationals on corporate responsibility and reputation risk. Basically what has driven me throughout all this work is an intellectual fascination regarding the links between big business, politics, and social issues.
But back to the book. What is the main finding? What are the most striking common elements from these 10 powerful western companies operating in poorer parts of the world throughout history? And as you probably picked up, the book doesn't draw an overall judgment about multi-nationals, whether overall they are good or bad. The truth on that is just that it depends. Some companies are being extremely rapacious others are relatively benevolent. Also, I think there have clearly been huge differences through history. Modern companies in general I think are less brutal, less willing to resort to naked force than the companies from the Imperial Era.
Having said that, however, there are patterns I detect through history. The main one, as I have already mentioned, is that these big multi-national, whether those from the 16th century or the 21st century, have regularly failed to anticipate social and political problems. They struggled to manage these issues effectively and I describe companies in this respect as being like clumsy giants. The failure of companies in this respect I think has not just been bad for their reputation, but its also often been bad for their bottom lines. One of the reasons for this is that the social and political context in which companies operate is often genuinely complex with suspicions of foreign actors, often very deep rooted among local populations. Another reasons might be summarized, or to use a bit of British slang, the cock-out factor, managerial failure.
For example, the headquarters of companies have often just failed to control what managers get up to on the ground in less developed countries. Also I think the management techniques have often been rather simplistic, and this I think even applies to some of the corporate social responsibility effort of some modern companies. CSR (to use the acronym) should be encourage, but I think it often doesn't get to the heart of development problems as I'll try and illustrate. A second general pattern I detect through history is that the western critics of multi-nationals—in other words, all the western campaigners based in cities such as London or Washington or even in the recent decades in San Francisco—have more often focused on issues that mattered to them rather than what's really important on the ground. The dissonance between I think western and local prospective, or western and local pressures on companies ads to the complexity for them of managing these issues. Anyway, that's the overall finding of the book.
To illustrate I'll just to describe the handful of the examples in the book. Two from history—the East India Company and the British South Africa company and two modern examples, which I'm sure you'll be very familiar with, Nike and also Shell in Nigeria. This means I'll miss out examples which I find interesting, for example the story of United Fruit, the American banana multi-national and it's somewhat underhanded dealings in Central America in countries such as Guatemala. Likewise I won't talk about the history say of the American oil firms investing in Saudi Arabia in the 1930s, 40s and 50s, that I think help explain some of the current tensions we're seeing the Middle East.
The British East India Company was the firm that essentially conquered India. It was headquartered in London and started off as a small trading concern in 1600. It evolved overtime into a huge territorial power running armies, schools, hospitals, indeed in charge of government and taxation over the entire Indian subcontinent. The reason it evolved from a trading to a government power was partly local political instability—a situation which obviously exists in lots of developing countries today. It was also a disintegration of the Mongol Empire, the empire that governed India before the East India Company arrived. The collapse of this empire essentially drew the company into local politics. Over time, the East India Company became very unpopular in India as a governing power. There was a huge local rebellion against the company in 1857, the Great Indian Mutiny, and eventually the East India Company was taken over by the British Government; it was essentially nationalized. The Great Indian Mutiny had raised questions about the capability of such a private sector entity to carryout the huge task of governing India.
In terms of the Western ethical pressure against the company there was indeed a lot of this. In spite of the early period that we we're talking about, there were quite a lot of British-based campaigners who criticized the company. However they tended to do so from a very British-centric western perspective. One of the main complaints against the East India Company in Britain, for example, was that company men were enriching themselves corruptly in India. There was a lot of resentment in Britain against company men coming back from stints abroad, very wealthy and then buying up land and mansions that used to belong to the established aristocracy in Britain. These company men became known as nabobs, a corruption, I guess is the Indian word, nawab, and incidentally for those of you familiar with British insults this is also the origin of the British word knob.
There was relatively little in Britain regarding the affect of this corruption on the local people in India. Interestingly, a lot of this ethical pressure helped to provoke local anger. For example, in the early 19th century, the British government actively encouraged the company to impose British values in India; Christianity for example, the Rule of Law, the English language. The British imagined that the Indians would be grateful for all of this. It was precisely however these impositions that irritated local people and lead eventually to the Indian rebellion against the company. So here is an early example of western pressure diverging from local pressure on the company pattern, as I'll explain, continues until today.
In terms of basic findings of the book, not of the problems encountered by multi-national when managing local politics, if you look closely at the East India Company's invasion of India you'll see, and quite extraordinarily I think, that it was largely a management accident. The instructions issued by the company's directors from the London headquarters were that company managers should just engage in peaceful trade. However, these instructions were ignored by gung-ho local managers, men such as Robert Cleve or Cleve of India, who got involved in fights with local India princes and as a result took over Indian territory. In other words, the invasion of India took place not because it was willed by the corporate headquarters, but precisely because the corporate headquarters failed to understand and to control the local situation. This was just not an accident.
It was also hugely expensive for the East India Company. Wars cost the company a lot of money and the tax revenues that it was able to raise from the local population in areas that it had conquered were often a lot less than had been predicted before the successive territorial invasions took place. Partly as a result the East India Company came close to bankruptcy at various times after 1750. So in other words, the company's failure to manage local politics was financially very damaging over the long run.
The second historical example is the British South Africa Company, another London based multi-national, this one dating from the 1890s. It was run by Cecil Rhodes, I'm sure you'll have come across the rather megalomaniac tycoon who also had a role in the early history of De Beers, the diamond company. The British South African Company was his vehicle for getting his hands on the gold reserves of the Matabeleland which comprised more or less present day Zimbabwe. Cecil Rhodes achieved this first of all by bribing local chieftains, men such as Lob Angola, King of the Matabele, and when this didn't work Cecil Rhodes waged wars against the African Tribes and invaded their land. Of course, it helped in this respect that Cecil Rhodes and his men had machineguns. They had the maxim gun where the African people really only had spears to defend themselves. At a later stage in the company's history there was a rebellion by local people in 1896.
The story of Cecil Rhodes and his company, rather like that of the East India Company, also provides an example of western campaigners failing to appreciate the reality on the ground. There were indeed numerous western critics of the British South African Company. For example, there was the London based Aberrational Protection Society, a forerunner of modern day campaign groups, like Survival International. It's focus was upholding the welfare of the natives—the word then used to describe African people. But the focus however of these sort of British campaigners was on issues such as preventing slavery, promoting Christianity and preventing alcoholism among the natives.
And interestingly, Cecil Rhodes was easily able to respond to these western pressures and in fact quite often turned them to his advantage. For example, his company banned the sale of alcohol to Africans and this was actually a very sensible move given that drunken laborers would be much less productive in his mines. Cecil Rhodes also committed his company to opposing the slave trade. This was actually another rather cunning move because by offering to clear Arab slave traders from Nasiland, another African territory, Cecil Rhodes was actually able advance his claims over that particular territory, too. But meanwhile, of course, he and his men were massacring many of the local tribes, a point, which the western campaigners seemed to have missed.
In terms of the management lapse illustrated by Rhodes story, I think it should have been relatively obvious to Rhodes and his managers that they weren't much liked by the local people. However Rhodes and his managers totally failed to anticipate the Matabeledian-churn rebellion in 1896. It's true that the local tribal situation was very complex and shifting, a situation indeed faced by some companies in some developing countries today. So it would have required some effort by the British South African Company to understand actually what was going on the ground.
However, the British South African Company not only made little effort in this respect, it became actually quite delusional about local sentiment. Cecil Rhodes and his manager convinced themselves that the Africans were actually pleased to have them there because for example the jobs and the political stability that the company brought. And I have a quote from a letter sent by one of Rhodes' men sent to his mother in Britain shortly before the 1896 rebellion broke out and to quote from this letter… "There was a rumor about a possible rising among the some of the tribes, but that of course was all moonshine. The natives are happy, comfortable, and prosperous and the future must be magnificent." Within a month, of course, the Africans tribes were spearing and slaughtering many of the company's men and their families. In other words, here is another example of a multi-national being somewhat blind to the social and political context in which it's operating.
Jumping very fast forward now to the present date, the example of Nike, you'll be I'm sure, very familiar with. In particular in the 1990s Nike was heavily criticized for allowing children to be, it was alleged, employed in it's contract factories in developing countries this was particularly true in Asia where most of Nike's factories are concentrated. Also it was alleged there were abusive working conditions in factories, physical punishments for example, low wages. It was often pointed out that for a pair of Nike shoes retailing in the west for $100, maybe $2 or $3 dollars would go to the workers who actually made them.
In this sense Nike became a symbol for its critics for everything in their eyes that is wrong with western consumer culture. Over consumption and material goods for example, the reliance on branding and advertising, reliance or focus on branding as opposed to the intrinsic value of products. However, what I would argue as with Cecil Rhodes, as with the East India Company, the western campaigners against Nike in the 1990s were still often focusing on different issues to those most critical to local people. All the western attention, for example, focused on child labor and abusive conditions within Nike factories. I certainly wouldn't excuse all of Nike's behavior in this respect, and at the same time, little attention in the West was paid to the broader economic social context for workers in developing countries. This was more complex I think than the western NGOs gave credit for.
For example, there was little awareness in the West about how export factories were actually sometimes assisting poverty-stricken families and also actually facilitating the empowerment of women in many Asian countries. Some of the factories in Asia are rather like factories of industrial revolution Britain in the sense they are providing the first opportunity for many women to secure paid employment, to work outside the home, outside the control of their husbands. This is something that even though indeed the conditions in factories are sometimes grim this is something that they themselves consider a positive development.
There has been some very interesting work on this by the anthropologist Niala Cabier. In a similar vein, there are examples of boycotts in the west against goods using child labor actually harming the interests of children in Bangladesh. For example, research showed that as a result of the threats of such boycott in America in the 1990, around about 50,000 children were sacked from export factories and according to this research a significant proportion of these sacked children went on to actually worse jobs on heavy labor in construction and sometimes in prostitution. Poverty was essentially driving most of these children into the labor market and nothing was being done to fix that underlying problem.
Similarly I would argue that the story of Nike revealed some of the common difficulties faced by management and mistakes made by them in these sort of complex issues. For example it is quite clear that when criticism about the labor conditions in its factories first arose, Nike was partly ignorant as to what was actually going on in these factories. It was basically paying its Asian contractors to make shoes knowing very little about how they were treating their workers.
Now, of course, Nike is working, I think, relatively hard to uphold basically the standards in its factories, certainly compared to other apparel firms. For example, Nike has a code of conduct, it has a small army of labor monitors, and it abides by all sorts of standards and conducts a lot of stakeholder engagement. However, it's still struggling to achieve the goal of protecting its corporate reputation. Quite a few times in at least the first few years of this decade, Nike was again taken by surprise when NGOs found for example children working in its factories, or that women were still being subjected to physical punishment. Nike's own labor monitors had failed to detect these abuses so there was continued damage.
I think this highlights that while corporate social responsibility can be helpful laudable as a management tool, it may not work entirely. It's not a foolproof way of protecting the corporate reputation. For most firms I think it is almost impossible to guarantee that there are no labor abuses in their supply chains, in particular if those supply chains are as large as Nike's, comprising many links, not just their suppliers but also the suppliers of their suppliers and so forth. It's complex for companies particularly if the governments of countries where its suppliers are based are themselves are failing to implement their own laws regarding labor standards
Certainly I think companies like Nike need to be aware of conditions in their factories and need to take steps to uphold labor standards, but they shouldn't use corporate social responsibility as a magic bullet for their reputational problems.
Fourth and final example, Shell in Nigeria. What I do in the book is to focus particularly on the company's activities in Nigeria in 1995 when there was a storm of protest surrounding Shell. Just to emphasize, I don't focus at all and I won't talk about much more recent controversy involving Shell with the recent level of its oil reserve. What I do is focus on is 1995 in Nigeria. That was the year that Ken Saraweja, the anti-Shell activist was executed by the Nigerian government. An execution for which Shell was held to be partly responsible.
Again like Nike I think Shell was seen by many members of the public and many activists as an archetypal exploitative multi-national. The focus of the criticism from the West was Shell's environmental record in the Nile delta, the delta being the oil producing region of Nigeria. Criticism in the West also on Shell's alleged complicity in human-rights abuses. Clearly these sort of issues were important to people on the ground. What I think was really driving the complaints didn't surface as much in western debate and this was the conflict between ethnic groups in Nigeria, regarding how oil revenues should be divided among them. Basically local people wanted more oil money than they were getting from the federal government. This issue didn't get much coverage in the west because I think it was less sexier a story than the image of an evil multi-national despoiling the environment or abusing human rights. Arguably I think it was the key local issue driving complaints about the environment and about human rights.
Interestingly, the issue of distribution of oil revenues is still a huge problem in Nigeria and there is still intense local anger against Shell regarding oil revenue distribution. However, now that the environmental story, to a large degree, has gone away, now that Shell, to a large extent, improved its environmental performance in Nigeria, there is relatively little western interest, I think, in what's happening on the ground. So the western scrutiny from Shell has been disconnected from the reality of Shell on the ground, as with the companies from history, but also in line from the historical pattern, I think that Shell's story illustrates the complex difficulties faced by management and indeed their frequent blindness in dealing with political issues.
Like Nike, for example, Shell was really taken aback by the degree of criticism in 1995. It didn't predict the public uproar even though I think it ought to have been able to do so. I think what had happened is that over the decades Shell had become eager to keep on the right side of the federal government in Nigeria, because after all in the past that was where the main political risk to its operations lay in the form of potential nationalization by the Nigerian Government of its stake in the oil industry. But as a result, Shell took its eye off of the local resentment that was brewing in the delta region. It failed to take action early enough to appease this local anger. I think it should have been relatively predictable that local ethnic groups should eventually rise up over this issue of distribution of oil revenues.
If you look at what's happening on the ground now, Shell is still really struggling to manage these local political problems. As with Nike this is in spite of all its corporate social responsibility efforts, its stakeholder engagement programs, its environmental controls and so forth. As I mentioned, there is still a lot of local anger against Shell in the Nile delta. One of the problems is, of course, that the Nigerian Government, to a large degree, remains corrupt. Nigerian politicians both at a federal and local level continue to siphon off a fair proportion of the oil revenues into their private bank accounts. As long as this is the case I don't think that any amount of CSR by Shell is likely to make local people very happy. For example, Shell is now spending three times as much on its community projects in the delta. The last figures I have it was spending around $70M a year on these community programs, yet only last year Shell was forced to shut down much of its oil production in Nigeria precisely because of local violence and local rioting between tribes. In this case it was the Ejors wanting a greater share of the oil wealth.
I think that on this example of Shell it's worth pointing out that some interesting parallels between Nigeria and modern day Iraq, parallels which may indicate what could go wrong in Iraq in the future. Iraq, like Nigeria, is obviously very rich in oil. It is also a state, which was constructed during the colonial era and as a result is comprised of a variety of different ethnic groups who often don't see eye-to-eye. Of course, Iraq's already redden by violence and by ethnic tension.
I think what will be particularly interesting for those with an interest in business issues is what's going to happen once a large scale western oil investment begins in the country. Given the size of Iraq's oil reserve there are any number of American, British, European, or Asian oil firms who are very keen to help Iraq's oil industry. These companies, I think, need to be very careful not to be caught in the same situation in the long-term as Shell in Nigeria; in other words, not to be caught in violent disputes between different ethnic groups, different local groups, each wanting a greater share of the oil revenue for themselves. Or put another way, here's a potential future example of a multi-national struggling to manage the political context in which it operates, a pattern that goes back to the East India Company.
So that's a taste of the case studies from my book. I do feel compelled given that this is a Stanford Business School Conference to conclude with a slide on the management lessons, although I have to admit I don't have any easy answers. I think precisely because these sort of political problems faced by multi-nationals are hugely complex it would be wrong to prescribe the simple or universal approach.
Having said that, I think the two general observations can be made. First, even given the complexity of many political pressures, it is clear that the companies I've examined would have been able to predict at least some of the problems they faced had they developed more sophisticated system of social and political risk assessment. And secondly, this understanding I think clearly ought to have informed their overall business strategy and processes because this would have allowed them to preempt some of the problems.
For example, in the case of the East India Company, a better understanding on the part of the London headquarters as to the political pressures faced by managers in India would have highlighted the need for much tougher controls on the behavior of these local managers. Or in the case of Nike, better intelligence early on regarding the labor conditions in it's factories would have indicated the need for tougher monitoring and control systems which might have preempted some of the criticisms. And then in the case of both Shell in Nigeria and the British South Africa Company, early management awareness of the growing discontent of local people and how this might have become explosive if left to fester would likely have made both companies, I think, more attentive to local needs.
So in all the cases I've described, better intelligence and a preempted management response would have allowed financial costly and reputationally damaging situation to have been avoided, or at least the risk of these sort of problems to have been reduced. Once the problems actually erupted the management solutions available to the firms whether military counter attacks in the case of local uprisings from some of the Imperial companies, or global PR campaigns in the case some of the modern companies responding to criticism were more costly and also less than effective.
In other words, I think the prescriptions are relatively uncontroversial, that of being companies focusing more attention on predicting and preempting issues.
As a final, final point, allow me to explore briefly why such an apparently obvious set of prescriptions are actually quite difficult for firms to implement. Part of the problem, I think, lies in the traditional structures and divisions of responsibility in many large firms. The departments charged with managing reputations on political issues in modern companies are often the public affairs, or the corporate affairs, or the communications divisions. In other words functions within the company whose principle task is seen to be that of public relations, promoting the company in the media for example and rebutting unfair criticisms. These departments, I'd suggest often lack the internal legitimacy which is necessary to secure the changes in corporate behavior which may be necessary to preempt public criticism or backlash. And these departments, I think also, traditionally operate in the reactive mode, responding to problems as they arise, rather than focusing on future trends and potential problems.
A related problem one might argue is the sheer difficulty of constructing internal systems of control between head office and local operations regarding political and social issues. Even internal reporting and control on financial performances, of course, is imperfect in many companies today. Moreover, local political situations given their complexity can't be summarized and communicated between headquarters and local operations in the same standardized way as say quarterly profits. Clearly in the case of the East India Company, internal control and political issues were seriously flawed but in many modern firms as well. Headquarters find it very difficult to actually guarantee the local managers are implementing all the global policies that the company has passed in this area, whether these be policies on the environment, policies on labor standards, or avoidance of bribery. Yet, of course, this sort of internal assurance is absolutely critical to reduce the risk that the opponents of the company will find grounds for criticism.
All this I think helps explain some of the limitations of corporate social responsibility. Without doubt CSR can be genuinely useful for companies as well as beneficial for the wider world. However, within the firms, responsibility for CSR tends to be handed to the public affairs or an equivalent department and this means that much of the focus of CSR tends to be on communications, producing well-meaning, often very glossy sustainability reports, for example, rather than on the more challenging task of insuring that corporate policies are implemented globally. Related to this, if governments of developing countries are not fulfilling their side of the bargain, if they are, for example, spending tax revenues corruptly or if they are failing to enforce labor legislation, then CSR on the part of companies is not going to be a magic bullet. It will only partly resolve the underlying development problems and hence will only partly protect the corporate reputation; and this certainly, I think, what Shell and Nike have found.
And finally, I think the examples in my book cast doubts on a common assumption, which underlies the CSR efforts of many firms that they'll be able to essentially reconcile or balance the interest of their various stakeholders. Yet I think this takes insufficient account of the conflicting nature of the pressures they face. I hope the examples that I have cited have illustrated that the demands of Western activists are not always quite the same as those of local people or those governments in developing countries.
Allow me finish there. I should it should be fairly clear that the management challenge faced by multi-nationals in this area are unlikely to be solved overnight. Or put another way, the political clumsiness or of corporate giants a pattern which began with the East India Company in the 16th Century, I will predict, is likely to repeat itself well into the 21st Century.
Thanks very much for your time.
Question: This is more of a rhetorical than an actual question. How far should corporate headquarters, or corporate behavior go in trying to change the lack of democracy and the prevalence of corruption? How to deal with it when it exists you covered that quite well, in trying to preempt criticism and you pointed out CSR is kind of a PR measure as much as anything else. But should a company try to alter the political conditions of a country or what can it do to give itself a better environment to operate in and give the people of the country a better life?
Litvin: Very good question in the light of the debate about CSR, and what it highlights is that what is expected from a responsible company is actually not very well defined, particularly when it operates in a developing country where… we'll put it this way… companies clearly do need to pay attention to corruption, human rights and some of those you've described. However, if they go too far in exerting pressures on governments of development countries, for example, committing themselves to uphold human rights, or to spend tax revenues in a transparent way, they risk accusations that they are behaving in a near colonial way, rather like the East India Company. So, interesting questions, I'm not sure I have an answer, I think it is very much open to question to what extend companies should become involved in these political issues.
Question: Wouldn't you say that there is just a fundamental principle in all your examples that the multi-national company really didn't have an interest in any development or benefit to the local people?
Litvin: That was particularly, I guess, the cause in the companies from the historical era. I start from the premise that the companies need to operate in their own long-term interest, but even then it was very much in their interest to ensure there was local political stability on the East India Company facing enormous rebellion as a result of changing ones standards, which did harm it. I think it's a very different situation in the modern period when the degree of scrutiny of multi nationals is much greater and hence companies rightly need to work harder to protect their reputation. In order to do that they need to take CSR issues seriously. But I do take the point that I think some advocates of CSR forget that companies are still ultimately about making money.
Question: Could you talk a little bit about bribery and multi national companies? I know it's illegal here in the U.S. for companies to issue bribes, but some European companies in the past have been able to tax deduct those. Transparency International and others groups have been very active in this area, has there been any improvement and what is the state of play today?
Litvin: I think there has been something of an improvement and in particular, as I am sure you are aware, there is the RECD convention on bribery which has now forced all RECD countries to pass legislation outlawing bribery. Obviously, there is a very big difference between the laws of the country and the practice of the companies, and particularly those investing in countries where corruption and bribery is endemic. For what it's worth, things are moving in the right direction, but such is the degree of corruption both in certain parts of the corporate sector and in certain countries that still have a long way to go.
Question: In your research you didn't mention ILO, the International Labor Organization. What was the role they played in trying to help the labor condition, for example, in Bangladesh and other countries.
Litvin: I certainly think they play a significant role. I couldn't give you all the details and they no doubt have quite a few initiatives focusing on labor standards in the corporate area. Perhaps a more significant actor in this field is the U.S. Global Compact. I believe that the ILO forms part of that which looks both at labor standards, human rights issues and environmental issues. There's room for a lot of initiatives and partnerships between the UN system companies, civil society and governments to try and overcome the problem of labor standards in factories and developing countries.