The Role of the Corporation

1
The Merck Case

2
Nearness to Large Rivers Eats the Eye:
Mossi Saying
Onchocerciasis—River Blindness

3
4
5
 Meanwhile, Back at the Lab ...
 A Merck scientist suggests that he has found a possible
cure for River Blindness.
 Requests management‘s support to pursue his lead
 It may earn the company nothing but can cure lots of people
 Should Merck fund this research?
 Ethical Rationales
 Business Rationales
 Risks? To veterinary markets? Product leakage?
 What is the impact on Merck´s corporate culture?
 How would you explain the decision to shareholders?
 How much to invest in socially beneficial but financially
unviable projects?
 How would you choose among them? 6
Merck’s Corporate Culture
 Merck’s management spent a great deal
of money on research because it knew
that its success ten and twenty years into
the future critically depended on its
present investments.
 The company deliberately fashioned a
corporate culture to nurture the most
creative, fruitful research
 …

7
Merck’s Actions & Motivations
 Merck scientists were among the
best-paid in the industry, and were
given great latitude to pursue
intriguing leads
 Moreover, they were inspired to think
of their work as a quest to alleviate
human disease and suffering
worldwide

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What Merck Did-1
 Decided to pursue the research
 It took 7 years for Ivermectin
(Mectizan) to be ready for human use
 Developed drug that could treat river
blindness with just one pill a year
 Unfortunately, no purchasers
 US Government and World Health
Organization decline to finance drug
 What should Merck do?
9
What Merck Did - 2
 Merck gave the drug away free
 Still, there were no distribution channels
 Therefore Merck financed a project with
WHO to distribute the drug, and to
prevent its diversion into the black
market for use on animals
 Ultimately, millions have been treated
successfully against river blindness

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11
Vagelos on why Merck did it…
 Skeptics asked Dr. Vagelos and other Merck officials why
the company endured the costs, aggravation and
complexities to develop and make Mectizan available.
 Dr. Vagelos responded: “When I first went to Japan
fifteen years ago, I was told by Japanese business
people that it was Merck that brought streptomycin
to Japan after World War II, to eliminate
tuberculosis which was eating up their society. We
did that. We didn’t make any money. But it’s no
accident that Merck is the largest American
pharmaceutical company in Japan today.” The long-
term consequences of acts of goodwill are not always
clear, he said, but “somehow I think they always pay
off.”

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 Merck Inspires Eli Lilly
 Eli Lilly decided to donate drugs for TB treatment
 Company + WHO + CDC + Harvard + Purdue =>
$70 million tech transfer program
 Beneficiaries: China, India, South Africa, Russia
 Allowed to make-sell older Eli Lilly antibiotics
 95% cut=>no market for Capriomycin & Cycloserine
 But they work well for drug-resistant strains of TB
 Partnership helps Eli Lilly recover from some public
relations controversies regarding its drugs
 Project advocated by two doctors-professors
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So, is Merck the ideal corporate
citizen?
The Vioxx controversy
 Vioxx was a blockbuster painkiller
 Internal study showed it increased risk of
heart attack + stroke in a few months
 Company claimed effects happened after
18 months
 Lost lawsuits that contended that Merck
deliberately suppressed findings
 Vioxx was subsequently withdrawn

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 Merck, AIDS & Africa
 Over 25 million people in Sub-Saharan Africa
have HIV
 Only 10,000 were getting needed medicine
 AIDS therapy involves drug cocktails,
including a drug produced by Merck
 In USA, cost of triple-therapy drug cocktail is
$10,000 per year
 Cipla, an Indian company offers $350 per year
drug cocktail to Medecins sans Frontieres
 Cocktail may violate patents on original drugs
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Merck’s Choice
 Offers to sell its AIDS drug at cost
 $600 (about one-tenth its price in USA)
 Cipla asks South Africa to allow it to make
patented drugs under compulsory licenses
 Merck & other companies consider, then drop
lawsuit. Agree to sell drugs at marginal cost
 Working with international organizations to
build health systems for effective use of drugs
 Concern about reactions from US patients
 Reverse flow of cheaper drugs to Europe/USA
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The Challenges of Being a Good
Citizen … Always
 Reputations are difficult to maintain
 When a company (or a person) has a
solid/good reputation, then any slight
deviation from the straight and
narrow path can lead to significant
fall in reputation
 And the public often feels let down and
feels as if it had been taken for a ride

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 River Blindness: Onchocerciasis
 Picture Credits
 http://www.sightsavers.org/What%20We%20Do/Our
%20Work%20in%20the%20World/Photo
%20Galleries/Nigeria/1759.html
 http://www.mrcophth.com/ophthalmologyonstamps/riverbl
indness/mainpage.html
 http://www.stanford.edu/class/humbio103/ParaSites2006/
Onchocerciasis/index.htm
 http://www.stanford.edu/class/humbio103/ParaSites2004/
Onchocerciasis/index.htm
 Video
 http://www.who.int/tdr/media/video/b-rolls.htm
 Merck Site on Mectizan Program
 http://www.merck.com/cr/enabling_access/developing_wo
rld/mectizan/
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The Rise of the Corporation
 Historical Emergence
 Corporation is a method to pool finances and
enable larger investments
 Early scams (e.g., the South Sea Bubble) led to
strict regulations and bans
 Later, corporations allowed to form and
shareholders granted limited liability
 Railroads in USA spur growth of corporates
 Delaware and New Jersey make incorporation easy
 Consolidation and formation of “Trusts”
 Antitrust movement aimed at breaking monopolies
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 Corporations viewed as responsible for Depression
Why do people mistrust corporations?
Joel Bakan: The Corporation (2004)
 Limited liability can lead to irresponsibility
 Shareholders have little or no true power
 Widely viewed as uncaring, impersonal, amoral
Justice Louis Brandeis, US Supreme Court, 1933
 “Frankenstein‘s monsters capable of doing evil“
 Can blunt or neutralize regulation
 Treatment and possible exploitation of labour
 Indulge in corrupt practices
 Owe no allegiance to geographic locations
 Ability to overpower host governments
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 Use PR/Branding to craft personified identities
 Berle and Means (1932)
 The corporation is potentially the dominant institution
of the modern world
 Managers are princes of industry, their companies akin
to feudal fiefdoms
 Separation of ownership and control is a challenge
 Unchecked corporate power could undermine democracy
 Because corporations have amassed so much power,
they should be “balancing a variety of claims by
various groups in the community and assigning to
each a portion of the income stream on the basis of
public policy rather than private cupidity.”
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Dodd (1932)
 “Modern large-scale industry has given to
the managers of our principal corporations
enormous power.
 “Desire to retain their present powers
accordingly encourages [them] to adopt
and disseminate the view that they are
guardians of all the interests which the
corporation affects and not merely servants
of its absentee owners.”
 Corporations risk losing their legitimacy if
they do not ‘appear’ to care about society
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Therefore …
 Companies have to take on a social
responsibility
 Show that they deserve to be free of governmental
constraints
 Need to behave as corporate citizens of the world
 Need to respect communities in which they operate
 Need to assume self-discipline, previously required
by governments.
 Need to avaoid corruption.

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 Reconciling Diverse Perspectives:
The Social Contract
 Relationship of business & society is a Social Contract
 Obligations
 Opportunities
 Mutual Advantage
 Businesses do not have an unquestioned right to
operate in society
 Those managing business should recognise that they
depend on society
 Business relies on inputs from society and on socially
created institutions
 There is a social contract between business and society
involving mutual obligations that society and business
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recognise that they have to each other—Ian Davis

The Bigger Picture: Society Needs
the Contributions of Corporations
Big business provides huge and critical
contributions to modern society
 Productivity gains
 Research and innovation
 Employment
 Large-scale investments
 Human capital development
 Organization
 Capital, technology, skills, other poverty-
reducing spillovers to developing countries
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 The Changing Social Contract
 Companies always had a contract with society.
 Direct stakeholders (such as consumers, employees,
regulators, and shareholders)
 Broader stakeholders (such as the communities where
companies operate, the media, academics, and the
nonprofit sector).
 Formal:
 laws & regulations; violation has legal ramifications.
 Semiformal:
 the stakeholders' implicit expectations, which if ignored
can bring about swift action. E.g., labor standards (Nike)
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 This social contract is fluid.
 Often, issues that lead to legislation start
out as semiformal expectations about
business; likewise, some aspects of the
formal contract are "deregulated.”
 More challenging are the "frontier" issues
that have not yet entered the formal or
semiformal contracts but could, over time,
become social expectations—something
that business might not even realize.

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Social Issues Matter to Business
 Social pressures are early indicators of factors
affecting corporate profitability beyond the
short run
Excessive prices of HIV drugs
Conflict of interest in financial markets
Obesity
Change in power of tobacco lobby
 Social pressures often indicate the existence of
unmet social needs or consumer preferences
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And Regulation Can Affect Strategy
 For companies in many nations, regulatory
policy increasingly shapes the structure and
content of industries and sets in motion major
shifts in economic value.
 In network industries such as airlines,
electricity, railways and telecommunications, as
well as in banking, pharmaceuticals, retailing
and other businesses, regulation is the single
biggest uncertainty affecting capital expenditure
decisions, corporate image and risk
management
 Beardsley, Bugrov & Enriquez, McKinsey Quarterly

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 Social & political forces can alter an industry's
strategic landscape fundamentally;
 can torpedo the reputations of businesses
 can create market opportunities by highlighting unmet
social needs & new consumer preferences.
 Companies must incorporate sociopolitical issues
systematically into core strategic decision-making
 They must see social & political dimensions not just as
risks—areas for damage limitation—but as opportunities.
 They should scan the horizon for emerging trends and
integrate their responses across the organization, so
resulting initiatives are coherent rather than piecemeal.
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 So what should businesses do?
 Make sure social issues are discussed at highest
levels as part of overall strategic planning
 Actively manage societal issues
 GE: more research on environmentally friendly tech
 Transparency in reporting
 Voluntary standards of behavior
 Profits are not an end in themselves—they are a
signal from society that the company is providing
something people want, and doing this in a
resource-efficient way
 Corporate leaders should articulate this, inside & outside
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 CEOs should take the lead in socioeconomic
debates that may alter industry structure and
rules of engagement in the long term
 Business, in essence, involves a series of complex
& continually evolving social trade-offs.
 In the power sector, the goals of low prices, energy
security, and environmental friendliness are in
permanent tension.
 So are the affordability of drugs, product safety, and
innovation in pharmaceuticals.
 Business leaders need to raise the public's
understanding of these unavoidable trade-offs.
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 Companies are on the defensive because CEOs find it
difficult to wield "soft forms of power" or to deal with
NGOs, that use emotional arguments.
 Instead of hard skills and in-depth knowledge,
sociopolitical issues require statesmanship, the
fostering of relationships with stakeholders, and
nurturing of assets that could be called "reputational."
 Thus, companies can reduce risk to their reputations
by anticipating new regulations and also create value
by making the most of social & political shifts.

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 Many sociopolitical issues are intractable and can't
be resolved by a single company or even an
industry.
 Go beyond competitive rivalries and look for
collaborative ways both to meet social concerns and to
find new ways for industries to create value.
 The difficulty is knowing when to work with others and
when to go it alone.
 Collaboration is attractive if stakeholders regard
all companies as equally culpable, if regulation is
imposed on an entire industry, or if isolated,
individual action would clearly destroy value.
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 Examples
 The financial and longer-term reputational impact
of social issues that backfire can be enormous.
 Monsanto lost significant market value in the backlash
against genetically modified organisms (GMOs) in the
European Union
 ExxonMobil’s cleanup costs for Exxon Valdez oil spill was
$2 billion—on top of $5 billion in lawsuits.
 New product or market strategies can emerge
from changing social and political forces.
 Toyota Motor's success with Prius can be attributed to a
growing interest in environmentally friendly products.
 Unilever's innovative product offerings in developing
countries, e.g., Wheel detergent in India, are a response
to the unmet needs of lower-income consumers there. 36
In practice…
 Companies tend to respond based on
the maturity of the issue
 Ascend a hierarchy of organisational
learning
 But proactive companies may also
have opportunities to differentiate
themselves!

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Orgnl Source: Zadek,
Learning
Civil
Higher Opportunity
Green Zone

Strategic

Managerial

Compliance

Defensive Risky Red Zone

Latent Emerging Consolidating Institutionalised

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Issue Maturity
 Civil
“We need to make sure everybody does it”

Strategic
“It gives us a competitive edge”

Managerial
“It’s the business, stupid”

Compliance
“We’ll do just as much as we have to”

Defensive
“It’s not our job to fix that” 39
 Porter & Kramer (2006)
advocate Strategic CSR
 When looked at strategically, CSR can be a source of
tremendous progress & can have great impact
 Corporations should look at where they should
intervene for strategic gain and make max impact
 CSR activities should be focused not on
 Generic social issues, but on
 Value chain social impacts (where company affects
society in the ordinary course of business), and on
 Social dimensions of competitive context (factors in the
environment that affect a company’s competitiveness in
the places where it operates)
 Choose CSR initiatives that provide shared value—
good for society and good for business
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 In some cases, industry-wide efforts needed
 Businesses have never been insulated
from social or political forces.
 Lobbying is as old as the hills
 What's different today is the
intensifying pressure and the growing
complexity of these forces, the speed
with which they change, and the
ability of activists to mobilize public
opinion.

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Corporate Social Responsibility
 Practices that improve the workplace
and benefit society in ways that go
above and beyond what companies
are legally required to do

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Three Perspectives….
Is CSR…
 ….the future of business. It’s what
companies have to do to survive and
prosper in a world where more and
more of their behaviour is under the
microscope.

- Jeffrey Hollender

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Or is it just…
 A “new creed” designed to mask the
fact that “the corporation….[remains]
designed to valorize self-interest and
invalidate moral concern…
- Joel Bakan
Author of The Corporation

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Or possibly…
 [not] merely undesirable but
potentially quite dangerous because it
can distort the market by deflecting
business from its primary role of
profit generation.
- Martin Wolf

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Milton Friedman endorses #3
 There is one and only one social
responsibility of business
 To use its resources and engage in
activities designed to increase its
profits
 So long as it stays within the rules of
the game
 i.e., engages in open and free
competition without deception or fraud

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Friedman’s Rationale
 Corporations are not persons
 Employees have a fiduciary responsibility to
owners of corporation—shareholders
 Employees & shareholders free to be
socially responsible with their own money
 Employees spending shareholder money on
CSR equivalent to a tax
 Unless you can make a business case for it

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Corporate Social Responsibility is
 An obligation, beyond that required by the
law and economics, for a firm to pursue
long term goals that are good for society
 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 that of the local
community and society at large
 About how a company manages its
business process to produce an overall
positive impact on society

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Corporate Social Responsibility
means
 Conducting business in an ethical way and
in the interests of the wider community
 Responding positively to emerging societal
priorities and expectations
 A willingness to act ahead of regulatory
confrontation
 Balancing shareholder interests against the
interests of the wider community
 Being a good citizen in the community

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Business Case for CSR
 It is the ethical thing to do
 It improves the firm’s public image
 It is necessary to avoid excessive regulation
 Socially responsible actions can be profitable
 Improved social environment will be beneficial to
the firm
 It will be attractive to some investors
 It can increase employee motivation
 It helps correct social problems caused by business
 It is in the long-term interest of the company—
enlightened self interest!

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Why CSR is prominent today
 A survey of 25,000 customers in 23
countries found that 40% had at least
thought of punishing a specific
company they viewed as not behaving
responsibly (www.mori.com, 1999)
 “Negative CSR associations can have a
detrimental effect on overall product
evaluations, whereas positive CSR
associations can enhance evaluations
(Brown & Dacin, 1997)

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According to David Vogel…
 There is a business case for CSR, but it is much less
important or influential than many proponents of
civil regulation believe
 CSR is best understood as a niche rather than a
generic strategy: it makes business sense for some
firms in some areas under some circumstances
 CSR cannot effectively address the opportunistic
behaviours such as free riding that can undermine
the effectiveness of self-regulation
 It cannot force companies to make unprofitable but
socially beneficial decisions

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 Voluntary regulation can be welfare
distorting
 Shell’s decision to dispose of its Brent
Spar oil platform on land
 Corporate responsibility for the labour
and human rights practices of their
supply chain partners has become an
important dimension of contemporary
CSR
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On Civil Regulation…
 Civil regulation represents an effort to fill the
governance gap between the law and the
market
 By applying pressure directly to companies,
activists and organisations seek to foster
changes in business practices that national
governments and international law are unlikely
or unwilling to bring about
 But civil regulation represents a second-best
alternative

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 Large MNCs are more vulnerable than
ever to pressures from consumers and
activists throughout the world
 Getting some large corporations to
change their policies is often easier
than changing public policy
 Governments may also promote CSR as
an indirect form of regulation
 E.g. US Apparel Industry Partnership
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Conclusions
 The business case for virtue is strongest for
 Firms that have made CSR part of their strategy
for attracting and retaining customers,
employees and investors, and
 Highly visible global companies that have been
targeted by activists
 Many firms fall in neither category!
 While civil regulation has forced some
improvements in corporate practices, for it to
have greater impact public regulation must
be strengthened

57
Corporate America: Split Personality?
 Given recent scandals, are companies becoming
more socially responsible or less ethical?
 Firms are rarely as consistently virtuous or corrupt
as the media portrays them
 Corporations are complex institutions subject to a
variety of pressures
 Some pressures encourage responsible behavior
 Some pressures reward unethical behavior
 Our challenge (as governments and the public) is to
restructure incentives to make it in firms‘ self-
interest to behave more responsibly
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Voluntary Corporate Initiatives
 Examples
 Cases

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The Global Compact

The Global Compact is a voluntary

initiative that seeks to advance universal
principles on human rights, labour,
environment and anti-corruption through
the active engagement of the corporate
community, in cooperation with civil
society and representatives of organized
labour.
The Ten Principles
Human Rights
 Principle 1: Businesses should support and respect the protection of internationally
proclaimed human rights; and
 Principle 2: make sure that they are not complicit in human rights abuses.

Labour Standards
 Principle 3: Businesses should uphold the freedom of association and the effective
recognition of the right to collective bargaining;
 Principle 4: the elimination of all forms of forced and compulsory labour;
 Principle 5: the effective abolition of child labour; and
 Principle 6: the elimination of discrimination in respect of employment and occupation.

Environment
 Principle 7: Businesses should support a precautionary approach to environmental
challenges;
 Principle 8: undertake initiatives to promote greater environmental responsibility; and
 Principle 9: encourage the development and diffusion of environmentally friendly
technologies

Anti-Corruption
 Principle 10: Businesses should work against all forms of corruption, including extortion and
bribery.

61
Global Compact Participants
 Alcan, Inc.
 Anglo American plc
 BP Plc
 DaimlerChrysler AG
 Gap Inc.
 Hewlett-Packard Company
 Nike Inc.
 Nissan Motor Co Ltd
 Petrobras SA
 Pfizer, Inc.
 Royal Dutch/Shell Group
 Siemens AG
 Starbucks Coffee Company
 Unilever
 Volkswagen AG
 Yukos Oil

About 100 of the FT Global 500 Corporations are members of the Global
Compact.
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The Equator Principles

63
Equator Principles Preamble
Project financing plays an important role
in financing development throughout the
world. In providing financing, particularly
in emerging markets, project financiers
often encounter environmental and social
policy issues. We recognize that our role
as financiers affords us significant
opportunities to promote responsible
environmental stewardship and socially
responsible development.

64
Statement of Principles
We will only provide loans directly to
projects in the following circumstances:
 The borrower has completed an
Environmental Assessment.
 The borrower or third party expert has
prepared an Environmental Management
Plan.
 Lenders have appointed an independent
environmental expert to provide
additional monitoring and reporting
services.
65
Equator Principle Participants
 Bank of America
 Barclays plc
 Citigroup Inc.
 Credit Suisse Group
 Dresdner Bank
 HSBC Group
 ING Group
 JPMorgan Chase
 Royal Bank of Canada
 The Royal Bank of Scotland
 Wells Fargo
66
Chiquita

67
Better Banana Project
 Chiquita supplies nearly 25% of the bananas consumed
in North America and Europe.
 In 1992, Chiquita teams up with the Rainforest Alliance
and voluntarily invests $20 million for capital
improvements to farms.
 By 2000, 100% of Chiquita’s farms met Rainforest
Alliance social and economic standards. Today, more
than 160 banana farms were certified, covering
120,000 acres in Ecuador, Colombia, Panama,
Guatemala, Honduras and Costa Rica.
 Chiquita protects significant swathes of rainforest,
recycles or reuses nearly 80 percent of the plastic bags
and twine used and has reforested more than 2,500
acres with nearly 800,000 trees and bushes.

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END

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