Jan Peter Balkenende was Prime Minister of the Netherlands from 2002 until 2010. He now is partner at Ernst & Young, and professor of Governance, Institutions and Internationalization at Erasmus University Rotterdam. Niels Merkx (left) and I (right) spoke to him about the implications of bottom-line pressure on corporate citizenship, the role of social media, and his views on government intervention. The interview took place in June 2011.
MAXIMILIAN BARTSCHT: Professor Balkenende, do you believe that it is profitable for business to be socially responsible?
JAN PETER BALKENENDE: Well, I think if that was the real motive that would not be enough. Corporate social responsibility has to do with the view you have on society and the roles companies play in it. Things are changing rapidly, as far as I can see. In this moment it is clear that we have a new generation of CEOs, who really want to change their companies. Let me give some examples:
First, Paul Polman of Unilever; with the sustainable living plan from Unilever we can see that everything they are doing is linked to CSR. When they talk about doing business; when they talk about the production of products; the way they treat third-world countries, everything has to do with that sustainable living plan.
Then Feike Sijbesma, CEO of DSM. You probably know he received several international prizes, for example from the United Nations for their contribution to the World Food program. You can see that the company of DSM really changed its policy.
Two weeks ago I visited the CEO of IKEA. If you see what they are doing; it is really fantastic. They have a view and it has to do with all aspects of their business; buying wood, cotton, and so on; the role of women, of children in developing countries. Everywhere you can see that they are busy; they are talking about the issue, “What is sustainability? What does corporate social responsibility mean for our company?” Now I am mentioning the bigger firms, but also in smaller firms you can see new developments.
What has been something ‘on the sidelines’ of the company is now becoming the core of doing business.
I think it has to do with the fact that these CEOs understand that the world is changing; that we will have a planet with nine billion people, that we have difficulties with our climates and the pressure of seeking new energy sources. Everyone is convinced you have to change things. Whether you like it or not, it is inevitable. And therefore it is really a necessity to talk about corporate social responsibility.
I think it is not the right way to talk in terms of “Is it profitable?” But of course it can help you.
Let me give you an example: a few years ago, it was Japan who placed sustainability high on the agenda. Of course they understand that if you want to do business it has to be linked to sustainability, but that has been the case in the past. We are talking about CSR for a long time. But in the past it was only when the economy was going into the right direction that people started to talk about corporate social responsibility. But when the economy went down and there were difficulties attention faded. Since 2005 you can see that it is becoming part of the core business.
And that is also my conviction: when the top of a company is not really interested in CSR, you can forget it. You need support from the top.
It is essential to do business in a sustainable way, to develop a real strategy on corporate social responsibility, which means much more than your reputation or whether CSR is profitable or not. I think it is inevitable, necessary and therefore I am happy with the fact that CEOs are talking about this important issue. And that is also my conviction: when the top of a company is not really interested in CSR, you can forget it. You need support from the top. If they want to implement it, it can become a successful strategy. There is much more on the agenda than the question whether something is profitable or not.
NIELS MERKX: Isn’t that an important issue then, that many business people are still stuck in the neoclassical paradigm and that when they do good to society it will affect their bottom lines?
JAN PETER BALKENENDE: Yes, the neoclassical approach is all about minimal government intervention and is linked to the Anglo-Saxon model of capitalism; meaning that you should do business, emphasize profits and preferably short term. But in my opinion it is better to have a long-term approach. And that is more an Atlantic orientation.
I mentioned Paul Polman. He said, “I’ll stop with quarterly reports; I will do it every half year.” Why? Because it is wrong to think of generating profits only in terms of the short run.
If you want a sustainable way of acting, if you want a sustainable strategy: talk about corporate social responsibility. You have to design a long-term approach. The issues I mentioned: climate change, energy, commodity prices and so on, are long-term developments as well. Therefore it is key to look at long-term tendencies. You can’t see changes at this very moment alone.
To come back to the neo-classical approach: we can see these tendencies in the United States of America where they say they do a lot on corporate social responsibility. But what do they mean? It means that they are doing business in a traditional way: make profit and afterwards give money to side projects.
Of course it is good to spend money on charity, on hospitals, research activities, universities. But then it serves as a kind of compensation for the profit you have made.
Whereas, what we see now is that companies like Unilever, DSM and the others also give money to social goals and causes. But they choose for a new real strategy. Therefore the neoclassical approach is not enough, because there are three important streams in economic theory:
First, Keynesian theory, you know the background: the correcting force of the government; government interventions in order to prevent difficulties. The problem with the Keynesian approach is that politicians want to spend money when the economy fluctuates in a good direction, but they also want to spend money when the economy is going into a wrong direction. This brings difficulties. I think this Keynesian approach lost its verve in the late 70s. Because then we saw that the traditional concepts of developer states lead to difficulties. People started to talk about the crisis of the developer states.
Second, the neo-classical approach: the government is not the solution, the government is the problem. Give freedom to the markets.
But we see what happened in 2008. That had to do with the fact that we have had an unbound capitalism.
Talking about the financial sector: you are selling products, but you cannot describe, or people do not understand what is really happening’. That is a great risk, we have all seen that.
Finally, there is the institutional theory. I prefer to talk in terms of institutions, their relation to society and the economy. That also has to do with the fact that there are some non-economic orientations, which are necessary to analyze, for instance the factor of trust. Trust is not an economic word. It is important to understand how economies are developing. Trust is different from labor, ground or capital.
You cannot analyze the economies of today without taking into account the factor of trust.
And trust is linked to the role of institutions. Fukuyama, described it very clearly in his book. He always admired the Netherlands just because of the fact that we have institutions: cooperation between employers, employees and the government. And he said that it is important to have a high trust economy.
Making profit in the short-run and making compensations to social goals is in my opinion not good enough. You need a new strategy, supported by the top of the organization. And that social corporate responsibility belongs to the hard core of doing business.
There is no alternative: we need a different attitude, different from the purely neo-classical approach.
MAXIMILIAN BARTSCHT: You mentioned that CEO’s do understand the need for long- term planning. But what about the immense pressure from the shareholders, who are interested in short-term results?
JAN PETER BALKENENDE: This is a very good question. You can see these tendencies. But I think if only focus on the short-run it can jeopardize your financial position. I can imagine that for most important shareholders long- term planning is also very valuable. Therefore it should be important also for the shareholders to develop long- term strategies.
Shareholders also have a social responsibility. Because if we say that the companies have to act in a socially responsible way and we are convinced that it has to go this direction, then you have to say the same about the shareholders.
NIELS MERKX: In your inaugural address [at Erasmus University Rotterdam, Ed.] you discuss Fukuyama’s account of trust from the 1990’s in connection to the recent financial crisis. Banks are not really trusted by the public anymore. When you consider social media; the ability of people to voice their opinion and to scrutinize companies online: has this become a threat to companies?
JAN PETER BALKENENDE: Firstly, about the discussion on trust. It is true that the discussion started with the book of Fukuyama in the beginning of the 90s. Then I had my first inaugural lecture. And of course it was very interesting and you could see a lot of academic disciplines have started to adopt the role of trust. We spoke with political scientists, with sociologist, economist, lawyers even. Everybody was talking about the role of trust, the subsequent role of institutions. Therefore it is remarkable that the financial sector was doing business in another way. If you knew the tricks how to make money out of money; I think it is a risky fair because the financial sector always has to serve the real economy.
What happened in the last decade is that we got a system that only had to do with the financial sector itself. You can understand it is impossible to make money solely with money.
Then you get difficulties, and then it is a matter of financial technique. We are seeing the consequences of that. We can see that at this moment many countries have a high stated-level, just because they want to support the economy. To do what is necessary. To let people keep their job. In the Netherlands, we had to take over some banks. To give them financial assistance, in order to prevent the collapse of the financial system. That was the truth.
The financial institutions should have acted in a different way. It is also a lack of social responsibility. This should never have happened. Now I can understand why people are dissatisfied and have difficulties trusting banks; that they are very critical. Also in the Netherlands, we have to deal with savings of the governments.
People see less money being spent on education, public housing, and the health system. Of course these financial difficulties are linked to what has happened a few years ago.
Therefore, people are dissatisfied with financial institutions in general. I believe this is the moment for those institutions to strengthen their profile. It is important that people will trust the banks again. However, this is not easy because of the unstable financial architecture, which has to be changed mainly in terms of supervision and the bonus system, which went too far.
But you can see already that at Wall Street, but also in London, people want to play the old game –they want to go back to the old system. And that’s not the right way.
You have to learn the lesson from what has happened. Restoring trust in the financial sector is a responsibility of the financial institutions themselves. And that brings me to social media. The world is really changing; when I studied we did not have computers. I started using my mobile phone in 1998. In 2002, the Christian- Democrats around the election campaign, as a part of a pilot project we started using Blackberry’s. As you can see, the world of Internet is not very old. You are used to it because you are young. Now, thanks to the rapid developments the world is changing. That is the reason why people are talking about emerging markets. For example, you have those call centers where you can talk someone in India – that is the world of today. There are a lot of chances because of the internet for these emerging economies. The flow of information around the globe is extremely rapid. The world has really changed. You can see it in the economy but also in the political world.
Because of social media the access to information is very easy, which in turn empowers people.
A few weeks ago I was in Singapore and I asked a professor about the control of new media in this area. My brother used to live there for an extended period of time during which the media was under governmental control. The professor told me that nowadays it is completely useless to block information on the Internet – the users are no longer accepting those governmental moves. The users will always find another way to find desired information anyway. For this reason Singaporean government is no longer censoring information, except for child pornography, of course.
Therefore, when people are not satisfied with the functioning of the financial system, then they will use the world of social media to express their dissatisfaction. And that is another reason why financial institutions have to communicate in the right way. But the most important thing is to learn the lesson from the past – act in a different way; do not take these enormous risks. Of course, if the people are doing a good job, they should be allowed to get a bonus, but it cannot go too far. You have to change the attitude.
If the customers do not accept the behavior of one bank they will switch to another one. Look at what happened at ING bank and their bonus system; you could see that people did not accept it. The CEO had to write an article in the Volkskrant just to warn against this type of thinking. This is just one example of a new, more direct communication with regards to the decision making process.
MAXIMILIAN BARTSCHT: So you would agree that, in the future, social media can play a role in holding a company accountable?
JAN PETER BALKENENDE: Absolutely. I am sure about that, because you can see that people are well informed. People understand they are surrounded now by a completely different reality than before the Internet era. They have to develop new strategies.
Talking about CSR, companies have to change some things. If not, they will face difficulties. There will be a lot of control by the people using the social media. This is also the reason why companies have to explain what they are doing. Let me give you a concrete example. I am currently working for Ernst & Young, and one of the important parts of the company is auditing. Let’s say the traditional way of acting around the accounts is talking about the financial results – basically facts and figures. Today you can see a transition from this traditional role of the auditor to a combination of accounting and an assessment of the sustainability and issues around it.
Nowadays, it is becoming more and more popular among companies to integrate the financial reporting with sustainability reporting. This has to do with the fact that companies are realizing that the world is changing and that you have to explain what you are doing.
That is why so many companies are very busy with providing society with the proofs of their activities – both business and socially related.
NIELS MERKX: There is also a discussion that – because companies are often believed to be responsible for society’s failures – politicians feel empowered to legislate and to confine competition. What is the role of regulation?
JAN PETER BALKENENDE: There is this traditional thinking that if there is a problem in the economy the politicians will correct it. And the usual politicians’ thinking in this situation is that they need more regulations and interventions. Of course, sometimes you need them.
After 2008 it was clear that we needed a new financial architecture. But in that case you should not have a national solution, that is nonsense. If you have a global problem you need a global solution.
This is the reason why within the G20 framework the talks revolved around the financial architecture; transparency, more integrity. The world of today is a completely different world than the one of 20th century. Because what we see now – and I refer to Parag Khanna, a young analyst from the United States, who wrote a book titled “How to run the world” – is the end of the nation state.
In the early days it was very clear that if there was a problem it was a national problem and you needed national policies to solve it. Today you need an international approach and a new way of decision-making.
If you want to solve issues like climate change you need to form new alliances between governments, multinationals, religious groups, NGOs and others.
Talking about international issues I do not think it is realistic to just talk on a national level. Of course there is a role for governments: education system, politics plays a role; security in the country. Therefore I am always defending a good quality government. But you must be aware of the fact that it is not the world of the nation state anymore. The world has changed – it is important that governments change their attitudes. I believe this is a realistic approach.
MAXIMILIAN BARTSCHT: You said that, in the future, corporations and governmental institutions have to work closer together to tackle global problems. How could this look like?
JAN PETER BALKENENDE: Let’s look at some examples. First, on the global level: the United Nations are busy with the Millennium Development Goals. The Secretary General, Ban Ki-moon, pointed out that these goals cannot be fulfilled without the role of the private sector. The fact that the Secretary General of the UN is pointing out so clearly that you need the private sector to reach these goals is a very good argument that the world is changing. Then on the European level. They talk about the issues of gender; equal rights where you need not only the international approach but you also need the creativity of the private sector. And people are already saying that this is the way of thinking – you need each other. On national level, you have to define what the strong features of the economy are and where the opportunities lie. It is important to balance doing business on the one hand and taking the right policy measures on the other. That means that a politician has to work together with the private sector.