Putting Economics Back into the Social Responsibility Equation:
The Principle of “Fiduciarity”
Social responsibility, as a measure of organizational performance, emerged in the 1990s in response to a perceived over-emphasis on the financial bottom line at any social or environmental cost. However, ISO’s initiative to create a social responsibility standard so enthusiastically embraces the concept that social and environmental impacts should be addressed that it risks marginalizing, or even ignoring, the financial bottom line.
ECOLOGIA urges ISO’s social responsibility standards writers to:
acknowledge that wealth creation is of significant social value;
- restore balance in the emerging social responsibility standard by re-introducing financial performance as one central aspect of organizational and corporate responsibility;
- recognize the interdependence of all three components of the triple bottom line: social, environmental and financial performance.
To make our case in this briefing paper, we look at the ‘bottom line’ from an economic perspective of fiduciarity, or economic stewardship, as well as from a social and environmental perspective.
“Fiduciarity” refers to a broad notion of financial stewardship, similar to the concept of environmental stewardship. (1) Fiduciarity is derived from the familiar moral and legal notion of “fiduciary responsibility”, an obligation to serve the financial interest of people who have entrusted others with their financial wealth and well-being. Historically, this has included the responsibility of corporate board members to shareholders, of investment mangers to investors, and even of experts such as architects and engineers who are expected to act in good faith to protect their clients’ economic interests.
“Fiduciarity” extends this very limited notion of fiduciary responsibility to all stakeholders who have a direct financial interest in an organization’s economic activities, just as concepts of social and environmental responsibility are being extended broadly to include affected populations. (2) Economic stakeholders would therefore include:
partners directly involved in the economic and wealth creating activity of an organization (e.g. those in a supply chain);
- members of a society who support the infrastructure that makes an organization’s economic activity possible (local tax payers who support roads and water); and
- those directly impacted economically by the product or service produced ( e.g. consumers of a patented life-saving pharmaceutical).
Twenty years ago, ‘the bottom line’ referred specifically to the profit or loss number on the last line of a financial report. The deeper cultural significance of this concept, and the value of wealth in society, is reflected in the fact that ‘bottom line’ has now become a metaphor for what matters most. For example, people make ethical statements such as “my bottom line is protecting wildlife”.
During the 1980s and 1990s, when the negative environmental and social impacts of some business activities were highlighted by civil society organizations, corporations began to publicly address these impacts; the concept of a ‘triple bottom line’ appeared. Today many corporations report their financial, social and environmental ‘bottom lines’ within a single report format such as the Global Reporting Initiative, or in separate financial and sustainability reports.
As ISO develops a global standard for ‘social responsibility’, we note that its strong emphasis on social and environmental impacts is occurring in the near absence of considering the economic impacts of organizational behavior. A broad concept of social responsibility or triple bottom line, an idea that originally emerged from a financial bottom line, is now in jeopardy of becoming a double bottom line without a solid foundation in economics.
The Social Value of Economic Activity
Adam Smith, the spiritual godfather of modern capitalism, noted that, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their own interest.” (3)
As anyone reading both of Adam Smith’s major works, The Wealth of Nations, and Theory of Moral Sentiments will discover, he was not endorsing the limitless pursuit of profit at any cost. Smith was merely noting that when individuals compete freely, as opposed to working against the 17th/18th century mercantilist market distortions that he knew well, products are likely to be produced at maximum efficiency and sold at minimum cost. Adam Smith then explained how these individual acts of self-seeking combine to maximize the wealth of a nation. Smith famously claimed that the dynamics of such activity were directed by an ‘invisible hand’, a kind of economic law of nature.
Then, in his Theory of Moral Sentiments, Adam Smith, as a moral philosopher, explains how self-seeking entrepreneurs are led by the same ‘invisible hand’:
“…to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of society and afford the multiplication of the species”. (4)
Smith’s early endorsement of “social responsibility” is linked to, and certainly not diminished by, his understanding of how wealth originates. Our work to create a Social Responsibility standard should be equally well informed about the social benefits of creating the wealth of nations and of financing actions to “advance the interest of society.”
So how do we re-introduce a more balanced view of the relationship between ‘pure economic activity’, social responsibility, and benevolence? How can ISO SR create a truly balanced ‘triple bottom line’? We believe that the answer is in a more integrated triple bottom line, one that incorporates the principle of fiduciarity.
Putting Economics Back Into the Social Responsibility Equation
Adam Smith provides us with a simple reminder of where the wealth of a nation comes from. But, in the intervening two centuries, we have also learned about the social and environmental externalities that can be associated with a highly efficient economic engine, especially when the efficiency of that engine presses the limits of the environment’s carrying capacity, and human limits of health and endurance. As we create a social responsibility standard that will function in a global system where economic, social and environmental values more than occasionally collide with one another, we must acknowledge these interactions. We need to address the benefits of wealth creation and the unanticipated or neglected consequences of our efforts to promote social and environmental value. Examples include:
- The role of poverty reduction in social responsibility – most of us in the standards making world have grown up in the midst of affluence, and live daily lives where life beyond the subsistence level is assumed, but for billions of people wealth creation beyond two dollars a day is the very essence of social responsibility;
- Bifurcation of the marketplace – much socially responsible manufacturing produces high-end products, for selected consumer markets, that the majority of the world’s consumers cannot afford;
- Supply chain inequities in sharing added value – many multinational companies force their supply chains to continually reduce prices. Many socially responsible companies, who successfully enforce social and environmental standards on their supply chains, also demand that those suppliers reduce the costs of their products yearly. These policies create artificial deflation that endangers workers, entrepreneurs, and entire national economies;
- Debt management- many corporations, municipalities and development agencies incur debts that broadly impact citizens, either positively or negatively. In any case, these actions have huge social responsibility dimensions.
By applying the principle of fiduciarity to the creation of the ISO SR standard, we may address the four issues outlined above by encouraging organizations to:
- assess and report their impact on wealth creation at whatever level is appropriate to the scale of their operation (community, national, global);
- assess and report on the ability of the general public to access and benefit from the socially responsible services and products they produce;
- assess and report on the degree to which there is equity in distributing the benefits of SR behavior in the supply chain; and
- assess and report on their debt.
The above are offered only as possible examples.
We provide this overview with the hope that “fiduciarity” may be seriously considered as one of the core principles for the emerging ISO 26000 standard. We suggest that “fiduciarity” be given the same status as “environment”, but we remain open to the possibility that this principle might be better applied generally across all social responsibility categories.
Table Summarizing ISO SR Building Blocks and Current Gaps
Building blocks currently included in the emerging ISO SR standard are shown in regular type face; gaps are shown in italics.
| TRIPLE BOTTOM LINE|| Social Aspects|| Environmental Aspects || Financial Aspects|
| || || || |
|RELATED RESOURCES|| social capital || natural capital || financial capital|
| || || || |
|CUSTODIAL PRINCIPLE (lower threshold of sustainable development) || maintain social order and subsistence quality of life|| conserve natural capital|| maintain wealth|
| || || || |
|RESPONSIBILITY PRINCIPLE (upper threshold of sustainable development)|| restore and enhance quality of life|| restore and enhance natural capital and environmental quality || fiduciarity(financial stewardship)|
(1) Stewardship is a concept deriving from Old English. The steward was given responsibility for protecting a household or manor's provisions (food and seed). A steward is entrusted with a community's sustainability.
(2) Our proposal, to extend ‘fiduciary responsibility’ into social and environmental accounting, mirrors complementary efforts to integrate social and environmental accounting into financial management. A study of international legal precedents for the latter can be found in a UNEP Asset Management Working Group study http://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf , produced in October 2005.
(3) Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Volume One (New York, Arlington House), page 13.
(4) Adam Smith, The Theory of Moral Sentiments, (Indianapolis: Liberty Classics, 1982) IV.I.10.
(5) We recently visited Granby, a city in Canada’s Quebec province, which proudly displays a bronze plaque in front of its City Hall. This plaque commemorates the date that it became debt free and released future generations from the burden of past generations’ financial actions. We were struck by how socially responsible and far-sighted these municipal financial stewards were.
Randy Kritkausky email@example.com
Carolyn Schmidt firstname.lastname@example.org