OFF-SITE EVENT Japanese and U.S. Perspectives on Why Corporate Social Responsibility is Good for Your Company's Bottom Line

November 15, 2006

Speakers
Marshall Carter, Chairman, New York Stock Exchange, Inc.
Hiroshi Hirose, Director and Managing Executive Officer, Sumitomo Chemical Company, Ltd.
William Lauder, President & CEO, The Estee Lauder Companies Inc.
James McDonald, President & CEO, Rockefeller & Co. Inc.; Chairman, Japan Society, Inc.
Nobuo Tateisi, Chairman, the CBCC; Executive Advisor, OMRON Corporation

Moderators
Masakazu Kubota, Managing Director, Keidanren and the CBCC
James S. McDonald, President & CEO, Rockefeller & Co. Inc.; Chairman, Japan Society
Richard J. Wood, President, Japan Society.

A distinguished panel of Japanese and U.S. executives met at Keidanren Hall in Tokyo with members of Japan Society, Keidanren, the CBCC and their guests to reflect on the impact of corporate social initiatives on society and on corporate financial performance.

The very success of corporate enterprises around the world brings challenges, began Marshall Carter, Chairman of the New York Stock Exchange. "Given the wealth and abundance in countries like the United States and Japan, it is difficult to grasp that so many people in the world live on less than $2 a day, or that 95 percent of the 35 million people infected with HIV live in sub-Saharan Africa, or that a quarter of the children in Bangladesh and Nigeria are working in their nation's labor force, or that some countries continue to have mortality rates 20 times our own, or that people in capitals of the most rapidly growing economies, Delhi and Beijing, breathe air that remains four times more polluted than what the World Health Organization deems is appropriate and safe."

It's important to recognize that "when businesses can make CSR initiatives a central part of their strategic plan, they create opportunities to redefine value, earn higher revenues and profits, and enhance their industry standing and global profile," he continued.

CSR can prompt companies to develop new products and attract new capital, with "information technology companies supporting community projects to bridge the digital divide, financial companies supporting microcredit initiatives, and professional service firms sharing management expertise with local community organizations."

Once CSR becomes a part of mainstream, day-to-day corporate life, a "broad trend sees CSR moving from assertion to accountability," the recent transformation of the NYSE being an example, Mr. Carter said. "My position and responsibilities overseeing the Board of Directors" at the NYSE "are independent and completely separate from the duties of the CEO. Our regulatory operation is separate, self-financing and completely independent from our business operations," and NYSE financials, top executives' salaries, and political and charitable contributions are all made public.

"That said, plenty of companies wrestle today with questions of what to be accountable for and who to be accountable to," he acknowledged. Among several responses he listed were the Sustainability Reporting Framework, adopted by the Global Reporting Initiative; the Extractive Industries Transparency Initiative, covering mining and energy companies; the Fair Labor Association guidelines, for apparel companies; and the Equator Principles, for banking companies.

CSR has come to mean creating partnerships rather than paternalism, he added, citing Cisco Systems' Networking Academies, developed with the aid of the UN, the U.S. Peace Corps and other partners; joint work in support of science education in the Philippines, by Avaya Group and Nokia, among others; and Procter & Gamble's creation of a low-cost water purifier in cooperation with the U.S. Centers for Disease Control.

DuPont and British Petroleum have each developed models for sustainable growth that have brought these companies prosperity and respect, he commented; and by accepting responsibility for labor practices at its suppliers worldwide, Nike has "regained its revenue strength and the strength of its global leadership position" following consumer protests in the early 1990s over working conditions abroad.

"Not every success story has to be a giant multinational corporation," Mr. Carter reflected. "A small firm of 50 employees, U.S.A. Technologies, developed a line of products called Vending Misers that reduce the electrical consumption of vending machines by up to 45 percent, in turn reducing greenhouse gas emissions and cutting expenses. The new products are gaining widespread acceptance within U.S. communities, colleges, corporations, and military and government installations."

Is the role of global business in this century indeed going to be positive?

"I certainly think it is, but at the present time only a few CEOs, people like Jeff Immelt at GE, have proven to have the backbone to head up these issues right face to face," especially on global warming and environmental concerns, answered Mr. Carter. "I would like to see more and more CEOs stepping up and addressing these issues, where clearly government can't do everything."

Are the New York Stock Exchange listing standards actually producing more responsible corporate behavior over time?

"They certainly produce a structure that allows you to measure whether they're meeting those standards," and when standards haven't been met, "many of those companies and their CEOs paid a very heavy price. Some of the CEOs are actually doing long terms in prison," he responded.

How have job transfers to emerging Asian countries and elsewhere affected corporate roles in the U.S. communities where jobs have been lost?

"The biggest danger we have from a corporation's trying to adhere to some political agenda rather than a business agenda is the movement of the politicians into the business environment, which we find to be fairly prevalent in the U.S., and more prevalent in Europe," replied Mr. Carter. "There have been as many success stories of companies building on their strength in another country," for example the jobs that Toyota has created in the U.S., he added.

How would you advise corporations on community and philanthropic efforts that can contribute to greater corporate value?

The focus should be on a company's core operations, Mr. Carter answered. "The value of doing good in your core operations will far exceed any amount of money that you can give from the bottom line for philanthropy."

***

"Japanese companies have long valued harmony, keeping the balance of interests among various stakeholders such as shareholders, employees, customers and community residents," began Hiroshi Hirose of Sumitomo, Chair of Keidanren's Subcommittee on Socially Responsible Management.

"This type of well-balanced management style can be found among the merchants of Omi during the Edo period," whose donations built bridges and roads and supported local charities, he remarked. "Such wisdom and experiences of our predecessors were deeply imprinted in our DNA, and have been inherited by modern Japanese corporations over the past 400 years."

Nevertheless, he said, corporate scandals led Keidanren to adopt a 1973 resolution in recognition of corporate social responsibility, and subsequently to create the Keidanren Charter of Corporate Behavior, as well as CSR implementation guidelines and a CSR promotion matrix that outlines factors to be considered in addressing corporate ethics, corporate governance, labor-management relations, conservation of natural resources and the environment, relations with local communities, and human rights and poverty.

Global poverty, malaria, AIDS, environmental destruction, all are enduring problems to which Japanese companies should seek out solutions, Mr. Hirose said. "Japan has scarce resources, so we rely for 90 percent of our energy and 60 percent of food" on overseas sources, and "we owe to the world for economic development."

"The Nobel Peace Prize laureate of this year, Professor Muhammad Yunus of Grameen Bank in Bangladesh, calls for the promotion of industrialized social enterprises--enterprises very much linked with businesses, that's what he means. I think this will be an inspiration for Japanese companies," Mr. Hirose went on. Sumitomo, he noted, has developed an inexpensive mosquito net that is used to help prevent malaria. "We first provided the technology to a Tanzanian company without any compensation"; demand for the nets, which use a polymer premixed with insecticide, has been huge, amounting to 30 million units.

In 2004 the ISO General Assembly voted to create a CSR standard that will apply broadly to nonprofits, labor unions and government as well as corporates, he said. Japanese business people, though preferring a more individualized approach, decided to take an active part in the design work, and Keidanren's three representatives to ISO hope to assure that the new standard, which is to be released in January 2009, is practical for small and medium-sized firms and, in contrast with ISO 9000 on quality management and ISO 14000 on environmental management, requires no third-party certificate, Mr. Hirose concluded.

Could you tell us how overseas investors evaluate Japanese companies' CSR initiatives?

Although "many companies release CSR reports or they post their CSR activities on their websites," these efforts are not well known abroad and need to be publicized more vigorously, replied Mr. Hirose.

In order to promote CSR, what expectations do you have for top management?

The attitude of top management is the key to CSR, Mr. Hirose answered. "They should be aware that their behavior is always watched by people outside and inside the company."

***

Taking off his Japan Society Chairman's hat, Jim McDonald spoke about CSR from the perspective of his day job as President and CEO of investment firm Rockefeller & Co. in New York. "We are involved with the management of approximately $29 billion of global assets," and although "I'm not sure that we started before Marsh Carter first came to Japan in 1960," Rockefeller & Co. has long made investments in Japan and other Asian countries and elsewhere around the world, he said.

"Most of the money we manage is not CSR oriented. It is about making good investments. But we have for many decades had socially responsive investing [SRI], which has been a particular interest of some members of the Rockefeller family."

Rockefeller & Co. seeks to invest in companies that can yield good returns and sustain themselves through bad times, he stated. "In bad economic times, in times of global change, in times when governments make bad decisions, profitability of private companies is very important."

At the same time, "we do not believe in corporate absolutes; and also very important, we do not expect perfection from companies when we evaluate them," said Mr. McDonald. "We believe that one of the core components of good companies is they last for a long time, and they do good things for their stakeholders for a long time. This of course has been a hallmark of Japanese companies," he remarked.

Of six key SRI metrics, Mr. McDonald listed the environment first, including "stewardship of natural resources; emissions reduction; energy conservation; reduced use of potentially toxic materials, a big issue which deserves more attention; cleaner energy; waste reduction; and of course global warming." One example in this arena is DuPont, he said. He noted that DuPont's CEO, Chad Holliday, credits his years of working in Japan--where some much of DuPont's business is based--as providing valuable lessons on environmentally sustainable business practices.

Additional factors that Rockefeller & Co. uses to evaluate SRI choices include involvement in community and philanthropy; workplace issues; product-service marketing; corporate governance; and human rights, Mr. McDonald continued.

Workplace issues are "a very complicated subject from culture to culture; and part of our view at Rockefeller is that that is an area where cultural perspective matters," he commented. "Equal opportunity seems to us to be both a good principle and very good business. And we believe that if we look at demographics for companies today, providing broad access to good jobs is good business."

"We have embraced in America a more diverse workplace, many of whom do not speak English as their first language, partly because it is in our tradition, but I believe also partly it is required to run a great company to seek talent wherever it can be found," he added.

"We are not in the business of giving stock tips," Mr. McDonald noted dryly, but he pointed to two companies whose common stock is included in Rockefeller & Co. customer portfolios and which in his view exemplify the value of SRI: Novartis, based in Europe, and U.S.-based General Electric.

Pharmaceutical firm Novartis indeed has done well by doing good, indicated Mr. McDonald. Over the past 10 years, the company has earned a yearly average return of 10.2 percent, "very attractive relative to returns on deposits or government bonds or other interests--and this is part of what has driven American prosperity over the past century, has been the willingness to be equity investors," he said. Novartis has excelled in corporate citizenship and environmental stewardship; furthermore, although "workplace diversity has not been one of their strengths," the company's leaders "have worked at this and have moved in the right directions."

At industrial conglomerate GE, CEO Jeffrey Immelt has begun to advance a role for the company as a leader in environmental issues, including a new joint venture with Japan's Hitachi to develop safer, more efficient forms of nuclear power generation, Mr. McDonald added. "I can tell you I think without putting the chart up that General Electric stock has not done so well in the last few years, so maybe there is a good future for General Electric as Mr. Immelt embraces this tradition."

Does it make sense to you to argue that human rights and the rule of law actually make for a better bottom line, especially in the long run?

"I think there is no doubt that in purely financial terms, those countries that have followed a rule of law have done better," replied Mr. McDonald. "Emerging Asia has a lot of work to do to come to grips with these fundamental interlocking concepts."

In the U.S., "we had our own sweatshops and our own horror stories," but "over time labor laws were enacted"--"and of course modern Japan has again been a leader in both public policy and actual treatment of workers," he reflected.

When private businesses go abroad to open a factory, or a new bank, is there a special obligation to take into account the extent to which international rulemaking can be followed in the new location? How do you proceed there?

"Sometimes, in our own country, government and the not-for-profit sector are unaware of just how enormous capital flows are in the private sector around the world today," Mr. McDonald responded. "Keidanren can play a leading role here in recognizing the importance of this."

Milton Friedman famously said, "The business of business is business.' … But it ought to be legitimate business." Ray Anderson, a leader in sustainability practices, thinks this should be updated, to add, "and not at the expense of future generations." Is he right that some stakeholders are not yet born?

Yes, Mr. McDonald said, though the concept of stakeholders has to be understood with some care. "Politicians around the world--they survive from election to election, and sometimes say things about stakeholding which sound very high minded but in fact probably are at the very short end, very self-serving."

"Japan is an example of a culture and a country which does think about the lives of children and grandchildren and great-grandchildren, and I think this is the very essence of how societies improve, is to be very forward looking," he added. "And the U.S. also, from the time of our founding fathers, was a society that could look a generation or two or three ahead."

***

Nobuo Tateisi, Chairman of the Council for Better Corporate Citizenship (CBCC) and Executive Advisor to OMRON Corporation, noted that the CBCC was founded in 1989 to support the acceptance of Japanese companies as good corporate citizens wherever they invest. In furtherance of that mission, the CBCC has sent delegations to the U.S. and Europe, to China, and to Southeast Asia, including Taiwan and Indonesia.
 
Corporate social responsibility initiatives "can play an important role along with governments to deal with problems such as serious poverty, environmental issues related to economic development such as water and air pollution and illegal logging, and social issues such as religious and ethnic violence and degradation in security due to terrorist activity," Mr. Tateisi observed. As an example, he pointed to work that the Thai government is doing with the Thai Business Coalition, a nonprofit education and training organization, to build HIV-AIDS prevention programs, including programs run in-house by multinational corporations.

Southeast Asian companies that compete as vendors in the global marketplace are being pressed to adopt international standards on workplace conditions and other CSR issues, he continued. These include SA8000 certification, a labor standard established by Social Accountability International, an American nonprofit founded as the Council for Economic Priorities Accreditation Agency, and standards set by the UN Global Compact and the International Labour Organization (ILO). Thailand recently adopted its own labor standard, but in his view "there still seems to be a long way to go for actual implementation, when we hear about the actual stories."

The dislocations and stresses of rapid economic growth have spurred the Chinese government to develop CSR guidelines and to improve the enforcement of laws on labor conditions and environmental protection that are already on the books, Mr. Tateisi said. Some multinational companies are requiring their Chinese supply chain partners to comply with SA8000; and Chinese enterprises investing abroad are taking steps on CSR in response to stock exchange rules and to the demands of foreign investors.

"Some Chinese consumers are skeptical about multinational corporations' commitment to CSR," fearing for example that Japanese companies will apply less rigorous standards in China than they do elsewhere around the globe, remarked Mr. Tateisi. "If Japanese companies publicize that they are always applying the global standard of their own wherever they do business, they can gain a lot of benefit from that."

How have multinationals' CSR efforts changed in recent years?

Earlier on, Mr. Tateisi responded, the focus was on philanthropy and community activities, and the CBCC visited the U.S. and brought back American practices as a model for Japanese companies. However, he said, the emphasis today is on Asia and on a broader range of issues, from consumer protection and forced labor and child labor to human rights, environmental protection, prevention of illegal competition and prevention of AIDS.

What types of CSR efforts should Japanese companies lead in Asia?

Japanese companies should serve as role models for local communities and tailor their efforts to the needs of the communities where they do business, he replied.

***

The Estée Lauder Companies, which William Lauder serves as President and CEO, was founded in 1946 by his grandparents Estée and Joseph Lauder and now has 26,000 employees and over $6.5 billion in net sales; and although CSR as a term may be new, "it is certainly not a novel concept" at his company, Mr. Lauder said.

"In 1992, my mother, Evelyn Lauder, started the Estée Lauder Companies annual breast cancer awareness campaign to generate awareness about breast cancer and the message that early detection saves lives," and together with Alexandra Penney of SELF magazine, the company created the pink ribbon that has become a global symbol of breast health. Estée Lauder has since given out over 60 million pink ribbons around the world, distributed leaflets with self-examination information, funded breast cancer research through sales of beauty products, and worked with magazines and other media to publicize breast cancer initiatives.

As part of Breast Cancer Awareness Month in October, the company illuminates monuments around the world in pink light, including the Tokyo Tower, to help remind women of the importance of getting a breast examination, Mr. Lauder noted.

"As corporate citizens we are very proud of these efforts. As business people we are confident of the return for these efforts. They bond us with our consumers, many of whom have been touched directly or indirectly by this ubiquitous disease," and build loyalty among employees, he said.

The M•A•C AIDS Fund, created in 1994, "is the heart and soul of the brand and critical to the company's position in the marketplace," continued Mr. Lauder. "Every cent of the selling price of the Viva Glam lipsticks now sold worldwide" goes to support men, women and children affected by HIV-AIDS; in 2004 this effort yielded over $600,000 from sales in Japan alone, which the company then donated to Japanese community-based AIDS organizations.

"MAC has built a huge and growing following through a unique positioning. Its tagline, ‘all races, all ages, all sexes,' is emblematic of this brand's highly creative, individualistic, edgy position. The MAC AIDS Fund is a perfect fit with the DNA of this brand. We know the fund is a driver of loyalty with MAC consumers and the more than 4,000 makeup artists throughout the world whom we employ with the brand," he observed.

Estée Lauder's Aveda brand likewise reflects a strong social theme, Mr. Lauder pointed out, and he quoted Aveda's founder, Horst Rechelbacher: "At Aveda, we strive to set an example for environmental leadership and responsibility, not just in the world of beauty, but around the world." Aveda's support of Earth Month every April includes donating a portion of sales from spa services and shampoo to conservation organizations, and "in 2004 these efforts led to nearly $1 million granted to 19 organizations helping to slow global warming," he noted. "Again, we believe that Aveda's socially responsible work helps us to animate and strengthen the brand."

"Our reputation and ranking has improved among Fortune magazine's most admired companies. Our standing rose four places in the consumer personal goods category to the number two position in 2005"; moreover, he concluded, "the return we receive in employee relations is priceless," with employee retention rates at Estée Lauder among the highest in the industry.

Estée Lauder has played a big role in supporting the local community, and increasingly on a global scale; can you expand on this?

"New York City is our home. Our company was founded in New York City and we are based there today, and we have used our presence in New York City as a company and as a family to be participants in the fabric and culture of the society," for example through board memberships at museums, hospitals and educational institutions in the city, Mr. Lauder said.

The company and its employees support many efforts that reach around the world, he noted. These include the Breast Cancer Research Foundation and Look Good… Feel Better, a program founded by the American Cancer Society and CTFA, the Cosmetic, Toiletry and Fragrance Association, that brings together employees of Estée Lauder and its competitors in over 15 countries to teach women who are undergoing chemotherapy how to apply cosmetics to help them look like themselves again.

Do you quantify the effect on your bottom line of cost savings from the high employee retention rates you have achieved?

The company gathers statistics on retention results, and it also observes the way employees respond to "the pride of the ethics and ethos of how we operate as a company," Mr. Lauder answered. It's publicly traded on the New York Stock Exchange, "but the fact of the matter is we are a family company, and we treat all 26,000 members of our family, our company, as family."

Is there advice you would have on how to approach labor issues abroad, advice for other companies that are building global consumer-oriented businesses?

"Most of the largest companies in our world still do the vast majority of our manufacturing in more developed markets," because technology equals if not exceeds labor in terms of resources needed--though this is likely to change over time as expertise becomes available in other markets, replied Mr. Lauder.

Where the company does use third-party manufacturers, it requires them to meet the same standards that govern working conditions in its own factories: "Only by holding to these standards can we be certain that consumers are getting the highest quality product, with a process of bringing the product to market that the consumer can be confident treats everybody along the process fairly," Mr. Lauder concluded.

--Katherine Hyde