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Corporate Responsibility: Myth or Reality?

Otto J. Reich
Assistant Secretary for the Bureau of Western Hemisphere Affairs

Remarks to the International Development Bank (IDB)

Conference on Corporate Social Governance
Miami, Florida. September 23, 2002

Giving an after-dinner speech is always challenging. When Winston Churchill left government he did what many politicians still do today—traveled around giving speeches. There is a story that one organization approached the former prime minister and inquired about his speaking fee for a speech of 30 minutes--he replied "$10,000". They then inquired how much it would be to speak 15 minutes--he replied "$15,000."

As Prime Minister Churchill recognized, it is always a much more difficult task to convey your message shortly and clearly.  Winston Churchill also advised speechmakers to "Be brief, or be brilliant."  I’m afraid you are going to be disappointed on both counts.

I am very honored to speak tonight on the very important subject of the social responsibilities of corporations. Corporate responsibilities have been much in the news lately, so this conference is timely. It now seems almost an act of clairvoyance that leaders of this Hemisphere should have agreed in Quebec, back in the spring of 2001, that this issue merited an international conference with the imprimatur of 34 heads of state and government. We can also thank several of those in this room for making the conference a reality, such as Ambassador Luis Lauredo, who represented the U.S. in the negotiations leading up to the Summit, and Ambassador Marc Lortie of Canada, who guided the 34 countries through these negotiations.

What is corporate social responsibility? Some people think it is an oxymoron, a contradiction in terms. This sentiment grew so strong in the 1970’s that the U.S. Senate Foreign Relations Committee created a Subcommittee on Multinational Corporations to document the transgressions of MNC’s. Many described it as the anti-MNC subcommittee.

Frankly, a lot of people in Washington do not know the role of business because they’ve never been in businesses; they’ve never worked in the private sector.  The first thing they need to know is that business is in business to make a profit. Without profit, there can be no employment, no taxes paid, no contribution to the national economy. So the first social responsibility of a corporation is to be successful—to make a profit.

But simply making a profit does not a corporation make. There are unfortunately, in our societies many ways of making a profit which can harm citizens. Narcotrafficking, kidnapping, and fraud are some examples of organized crime, which unfortunately, pay well.

I have been a businessman myself. And I am a part of a proudly pro-business Administration. I believe that the corporation does exist first and foremost to make a profit honestly--to create wealth honestly. The corporate structure has been instrumental in organizing production efficiently; creating prodigious wealth and spreading prosperity all over the globe that is the essential role of the corporation in society, and prudent public policy must recognize and nurture that role.

I also believe that the corporation and the profit motive are compatible with social responsibility. Moreover, enlightened self-interest should inform any businessperson that fulfilling social responsibilities is good for business. A healthy civil society is a necessary condition for corporate success and the constructive participation of corporations in civil society is important to the success of democracy.

Democracies rely totally on the participation of their citizens in the political process and civic life. A corporation is legally defined as a fictional person for purposes of contracts and other considerations. In Spanish, the term of art is persona juridical. A person in any society has obligations to others. Those obligations constitute the structure of civic life. In my view, the social responsibility of a corporation is, very broadly, good citizenship. And because we recognize the importance of good corporate citizenship, the United States supports and encourages corporations to fulfill their social responsibilities here at home and throughout the Western Hemisphere.

The Bush Administration Policy











Photo by Eric Draper
President Bush recognizes that the Americas are at a defining moment in their history, and without belittling the many crises that face us throughout the region, the President believes that this moment is a historic opportunity with great promise for us all.

We know that the future prosperity and security of the United States are bound to that of our neighbors. Our destinies are linked by the ideals, aspirations and geography that we share. We in the United States know that we cannot have security here at home, for example, if the Hemisphere is not peaceful. And our growing commercial relationships bind the economy of the United States to the region.

The U.S. sells more to Latin America and the Caribbean than to the European Union. Trade with our NAFTA partners is greater than our trade with the EU and Japan combined. We sell more to the Southern Cone common market (MERCOSUR) than to China. Latin America and the Caribbean comprise our fastest growing export market.

This understanding of our mutual interests highlights our policies in the Western Hemisphere. For example, the United States encourages U.S. businesses to invest in the people and communities where they work, as well as uphold the highest ethical standards. One of the ways we do that is through partnerships between government, corporations, and non-governmental organizations.

Governments and Corporations Working Together for the Public Good

These public-private partnerships are an effective tool for development. Earlier this month at the World Summit for Sustainable Development in Johannesburg, Secretary Colin Powell said that such partnerships between government, civil society and the private sector are "key to spreading the benefits of sustainable development as widely as possible."

One example of this kind of cooperation is the Integrity Pact. By entering into an Integrity Pact, businesses agree to adhere to transparent commercial practices. We have found that many corporations are eager to join because it lets everyone know that a corporation will not be greasing any palms. Consequently, they receive fewer requests for bribes. 

One example of an ad-hoc government-business cooperation occurred recently when corrupt practices gave unfair advantages to local firms in a country, the name of which I will not mention. American companies said that they may have to leave the country, which would have resulted in the loss of thousands of jobs and substantial income.

Instead, our Embassy worked with the businesses to bring their concerns to the government’s attention at a very senior level. The government created an investment council to respond, and the conditions improved remarkably.

Other governments in the Hemisphere are pursuing public-private partnerships as well. For example, the Brazilian state of Acre has devised a plan with international organizations and rubber companies that will allow local people to harvest rubber trees, while sustaining their environment.

The Inter-American E-Business Fellowship Program is a Summit of the Americas initiative. With the help of the U.S. Department of Commerce, participating U.S. businesses teach professionals from across Latin America and the Caribbean how to use information technologies. The program is currently in its second year, and so far, it has been very successful. 11 U.S. companies are participating, ranging from Bell Helicopter to Bank of America to Wal-Mart, and we are encouraging more U.S. businesses to become involved. This transfer of managerial expertise is a direct investment in our neighbors’ stock of human capital, and we believe that these kinds of investments will pay dividends for the whole Hemisphere.

Socially responsible companies know that they can expand their market share, while sharing their best practices with others. Businesses can disseminate those best practices through supplier relationships, worldwide company codes of conduct, and community development programs.

For example, Caterpillar organizes regular "Quality Forums" and "Supplier Days" to discuss best practices with its suppliers. At ITT Industries in Costa Rica, the environmental, health and safety standards that are required in the plant are also applied to local suppliers.

Companies ranging from John Deere to General Electric to Procter & Gamble to Sun Microsystems have worldwide explicit business codes of conduct. Some of the most important elements of these practices are provisions protecting the rights of workers.

Government, private sector and civil society institutions all need to encourage the implementation of internationally recognized labor standards. These codes can be very effective, if they truly affect the culture and activities of the corporation. Living by a code of conduct is more than an exercise in public relations/IT is a challenge that corporate leaders and employees must always strive to meet.

Some companies have made direct investments in the Hemisphere’s future. Daimler-Chrysler established an educational foundation in Mexico that contributes approximately $2.5 million per year. UPS created a Community Investment Grant to fund educational programs throughout Latin America.

These exchanges, investments in communities, and socially responsible partnerships are a few examples of good corporate citizenship. Many other companies, perhaps some are represented in this room, are engaged in similar efforts throughout the region, and they should all be applauded. But we are not satisfied to rest on the achievements as significant as they are. We can do better. President Bush believes that greater integration of the economies in this Hemisphere… more collaboration between the people of the Americas… will lead to greater prosperity for all of us.

We believe that trade is the vehicle for that integration, and President Bush campaigned continuously since his inauguration for the authority to negotiate the trade liberalizing agreements that will achieve this goal. Recently, the United States Congress finally granted President Bush Trade Promotion Authority, and the President has signaled his intention to conclude a free trade agreement with Chile and initiate free trade negotiations with the nations of Central America as soon as possible.

All these efforts will culminate in the Free Trade Area of the Americas (FTAA) agreement, which would extend a comprehensive free trade area throughout the Hemisphere. We firmly believe that the FTAA will have a profound and constructive impact on the region.

We know that NAFTA has had a beneficial impact on Mexico. Economically, NAFTA ushered in a period exceptional growth and job creation. That new economic dynamism had political ramifications as well, unsettling the status quo and providing momentum for other reforms.

I know that for many in Latin America today "reform" is a tired slogan. Many believe that the neo-liberal movement toward democracy and market economies, which has had such remarkable success in the last twenty-five or so years, is now exhausted, and some are disenchanted with what their leaders said were democratic and economic reforms. I believe that where the public has appeared to have lost its appetite for reforms, they are actually expressing their frustration with the imperfect implementation of market economies and with the persistence of corruption, rather than with the models themselves.

When you hear me speak of corruption in Latin America I am not suggesting that Latin America has a monopoly on dishonesty. That is not true. The United States has certainly had plenty of its own corporate scandals lately. But if you look at how the United States has handled those wrongdoing scandals, you see what the rule of law can do.

Because the US does not have parliamentary immunity--this summer, Congressman James Traficant was tried, convicted, and expelled from Congress. And before him, Senators and Congressman suffered similar fates. We have seen presidents impeached or resign, and vice-presidents, governors run out of office.

Because we have independent and honest courts, a major accounting firm is facing a $350 million RICO action and several officers of World Com, TYCO and Enron and many others are about to be promoted to the position of Corporate Vice-President In-Charge-of-Going-to-Jail….and CEO may mean Convicted Executive Officer to many former chief executives.

There is no perfect democracy or market, as there are no perfect people. Certainly, we don’t claim to have either. Precisely because none is perfect, all of us must have as incorruptible institutions as possible.

I believe that corruption, whether by businesses, governments, or individuals is the biggest impediment to development in the Hemisphere. I am not alone: the World Bank has identified corruption "as the single greatest obstacle to economic and social development."

Transparency International cites various studies indicating the cost of corruption in some countries in South America is $6,000/capita per year. That is particularly revolting when you consider that one-third of Latin Americans live on $2 a day.

Corruption hits the poorest the hardest. Small businesses pay, on average, more than twice as much of their annual revenues in bribes than do large firms, according to World Bank data. And other studies by the World Bank show that the higher the level of corruption, the higher infant mortality tends to be. Likewise, the lack of the rule of law is tied to lower literacy rates.

Why should this be of any interest to the United States? What business is it of ours? Why are we trying to impose our values on others?

This concerns us because the freedom and prosperity of our neighbors concerns us. Because there are some universal values such as the desire to build a better world, to leave it a better place for future generations, Because we have geographic, historic, cultural, political, ethnic, even familial ties with this hemisphere, and we want our hemispheric family to be healthy, educated and friendly. So even if we had no reason other than purely selfish commercial reasons, we would want to eliminate corruption, so our neighbors can be prosperous and contribute to our prosperity.

And also because corruption costs the American taxpayer in many ways. The U.S. Dept. of Commerce estimates that competition by U.S. firms for 60 contracts worth $35 billion may have been affected by bribery of foreign officials just in one-year period from May 2001 through April 2002. Of these 60 contracts, U.S. firms are believed to have lost nine contracts worth $6 billion. Regardless of what you may think of the corporations themselves, you Now, some you may say to yourselves, you have to realize that if those contracts were not awarded fairly, then those billions of dollars of were misspent and did not contribute to any country’s development.

Corruption undermines not just economics, but, as I said to earlier, democracy as well. Transparency International Chairman Peter Eagan stated, "In parts of South America, the graft and misrule of political elites have drained confidence in the democratic structures that emerged after the end of military rule."

The World Bank reviewed the 2002 Corruption Perceptions Index stated that the "most worrisome" regional trend was "the notable deterioration in Latin America and Caribbean over the past two years. According to the 2002 Latinobarómetro, 80% of those Latin Americans surveyed said that corruption has increased in recent years. Not surprising these trends have been accompanied growing dissatisfaction on the part of Latin Americans with their leaders, even their system of government.

The OECD and United Nations Commission on Trade and Development, recognizing the direct impact of corruption on economic growth, development, and trade, have for years fought bribery and corruption. One of the keys to attracting foreign investment is judicial transparency.

The United States Government feels that fighting corruption is so important that we have made it a part of how we provide economic assistance. The President’s Millennium Challenge Account, announced at the IDB and just last March in Monterrey, Mexico will require commitments to political, economic, and social progress. President Bush has asked Congress for $5 billion for this new fund. It will be used only in those countries that root out corruption, uphold human rights, and invest in social programs such as health and education.

There are some in the Hemisphere who are already making great strides. We fully support President Bolanos of Nicaragua in his battle against corrupt politicians who are protected by parliamentary immunity.

It is no accident that Chile, the nation with the highest rate of economic growth in the hemisphere in the past 15 years, is also the most transparent. In Mexico, President Fox is leading a charge against the decades of abuse that have corroded the Mexican people’s faith in their government.

The new governments of Honduras, Bolivia and Costa Rica have pledged that they will fight corruption across the board. Much of El Salvador’s remarkable economic growth is due to consecutive honest governments since the end of the war in 1992, especially that of the courageous President Flores.

Uruguay arrested a banking magnate on fraud charges. This is just one example of that small country’s large contributions to this hemisphere’s fight for honesty.

Ecuador is investigating corruption in the Finance Ministry that allegedly went all the way to the Minister himself.

There are more examples, to numerous to mention. We are further encouraged by the fact that 27 out of 34 nations in the hemisphere have ratified the OAS Convention Against Corruption, promising to clean up their systems.

The United States will support our neighbors in their efforts to fight corruption, and we will help them keep their promises that the theft of the people’s treasure and trust will stop. We will continue to deny or revoke visas to this country to private or public figures that have broken the law. And if they are already here and we have reason to believe that they have ill-gotten gains in this country we will work with our domestic law enforcement agencies to pursue all legal avenues of recovering those assets and sending the proceeds back to the people of the countries from whom they were stolen.

I could not reach this point in my remarks without mentioning the most blatant example of corporate social irresponsibility in this hemisphere—the one country where corporations operate without any apparent social conscience and where the government has misappropriated all the means of production—Cuba.

It is inconceivable to the Bush Administration how companies who abide by labor, environmental, and other rules in their home countries can take advantage of a captive population with no freedom of movement, speech, association or any other. Not only are these companies not contributing to opening the system, they are perpetuating tyranny. And when the Cuban people rejoin the family of democratic nations, they will remember those who stood with them and those who did business with their oppressors.

Conclusion

I would like to conclude by recognizing again the important contributions that corporations make to our lives. They are the most efficient instrument of wealth creation around the world, and it is vitally important that we nurture that role. But corporate officers cannot believe that they are above the obligations of a citizen to society. To the contrary, corporate leaders should recognize the disproportionate importance of their fulfilling those responsibilities to our future prosperity.

Corporate Social responsibility is not a contradiction in terms—it is however only one element of a series of responsible actions by governments, individuals, and companies that leads to prosperity in free societies. We all have a role to play in that chain of events, whether as representatives of government NGO’s, business, IFIs, MDBs, or civil society.

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