Injecting CSR in to business DNA

By Dilshani Samaraweera.

Published on October 15, 2012 with No Comments

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Corporate social responsibility is here to stay. But do local businesses understand the science of fixing profits onto long term sustainability, using CSR as the connecting piece? Many are still trying to fit the pieces of the puzzle together, while some are jamming any piece into any convenient hole. This any-fit approach, says Chandula Abeywickrema, a CSR practitioner from before the word arrived in Sri Lankan shores, is a no-benefit in the long term.

For any right thinking business, profit is its purpose of existence. But the solely shareholder value concept has now shifted slightly to accommodate the concept of stakeholder value. CSR is a key element of this thinking.

“It’s because any business anywhere, has to stand with its feet on the ground and face reality. Businesses must operate in a wider society. If they don’t acknowledge this it is not practical and they are not sustainable,” says Abeywickrema, the Deputy General Manager of Hatton National Bank. Abeywickrema is one of the longest practitioners of CSR in Sri Lanka, or what he calls CCR – because “at that time, when we started doing CSR, CSR didn’t even exist in the business lexicon.” Abeywickrema is one of Sri Lanka’s most highly sought after experts in the field of microfinance and poverty alleviation today and among his other involvements, is currently the Chairman of Banking With The Poor Network and the Lanka Financial Services for Underserved Settlements (LFSUS). He is also a director of Thaneakea Phum (Cambodia) and is an Advisory Board Member of the YouthSave Consortium, USA.

Although  CSR was not a clearly articulated concept at the time HNB incorporated CSR into its business, today, HNB is a solid example of making this concept work, and work profitably, over a considerable period of time. The conduit is Gami Pubuduwa(GP), HNB’s now hugely successful micro finance programme, introduced in 1989.  The bank also launched a banking programme for school going children, a few years after the GP programme, to introduce young people to financial transactions and commercial concepts at an early age.  This too, has been a ground breaking project that has, in turn, built HNB into one of Sri Lanka’s biggest national brands.

Both GP and the School Banking programmes are held up as ground breaking CSR activities in Sri Lanka, because of their origins and also the bank’s attitude towards operationalising the projects, particularly the sustainability element of both projects. Abeywickrema says amassing wealth for private consumption while ignoring the wider social and environmental context is bad business practice,  because this attitude makes for unsustainable business. Therefore, businesses, while ensuring short term profitability, need to also balance long term sustainability.

Today, sustainability is a CSR buzzword and has mainstreamed into general business management. The pirate raiding party mentality of get in, grab what you can and get out attitude, once seen as aggressive business practice, is dead. Instead, sustainability, and another CSR buzzword, innovation, have taken over business thinking. While the most basic type of CSR is traditional corporate philanthropy, where companies allocate some percentage of pre-tax profits to what they deem as a worthy cause, many, like Abeywickrema, feel this disconnected attitude to CSR does to make such activities sustainable or innovative. However, some companies have taken the concept to another, higher plain. They have transformed CSR into a form of business risk management, mainly targeted at reputational risk management. The local garment export industry has reaped rich rewards by upgrading its reputation as an ethical manufacturer by upholding international child labour standards and with investments into environmental sustainability.

In the South Asian clothing industry, where companies like Nike and Gap came under attack for use of child labour, Sri Lankan garment factories have stood out by adopting a different approach. The industry has also adopted another CSR buzzword, sharing. Larger apparel factories support smaller ones, that do not have adequate global marketing reach, by getting the orders and subcontracting them, after first helping the small units meet codes of conduct laid out by large international labels.  The industry has also restructured its relationships with internal industry players such as suppliers and even competitors, to allow sharing in different ways. As a result CSR is creating the opportunity for shared value that benefits the overall industry, individual businesses and the wider environment.

Too often companies go on the defensive tack, as a form of damage control, after their reputations have been hit. From environmental disasters such as the Bhopal pesticide factory explosion, to the British Petroleum oil spill in the Gulf of Mexico in 2010, corporates all over the world are facing flack for environmental impacts of their operations like never before. Business social behaviour is also closely watched. Big Pharma was hit by its refusal to make antiretroviral drugs available at a lower price for HIV/AIDS patients in developing countries. Taking a lesson from the past and incorporating changing attitudes towards business and profit making, corporates are now building risk mitigation into their CSR systems. A few companies like HNB however, have gone beyond even this point, and have used CSR as a platform for business opportunity by incorporating CSR into its business fundamentals in total, from planning, to the final delivery of services, instead of limiting its application to a form of reputational risk management.

HNB’s micro credit programme and school banking concepts were, from inception, expected to make their existence worth their while – but not within the short life span of the annual balance sheet. The reason, says Abeywickrema, was because they were not introduced purely as profit making propositions – a highly unusual decision coming from a very money minded institution like a bank. In the case of Gami Pubuduwa, the intention was to support social equity and promote economic inclusiveness in Sri Lanka, at a time of traumatic social unrest.

GP was originally HNB CEO, Rienzie Wijetilleke’s brain child.  In the late 80s, HNB, then a very much smaller bank, felt the full force of the pent up rage of the second youth uprising in Sri Lanka. Watching the flames of frustration eat up the economy, Wijetilleke had decided that unless young people are directly harnessed into economic activity, HNB’s (and the country’s) very survival was at risk.  For Wijetilleke, a business entity could not thrive or achieve its potential, within an environment of social unrest.

“At that time no one spoke of CSR. So what we wanted was to make our economy more inclusive by giving opportunities for young people to engage in economic activities and to share the benefits of the open economy,” says Abeywickrema who joined HNB in 1989 as the head of marketing and spearheaded both the GP and school banking drives across the country. This, wider view of social impact, is the fundamental difference of Abeywickrema’s concept of CSR, compared to how many other Sri Lankan managers view CSR.  Both Abeywickrema, and Wijetilleke, view CSR not as a political correctitude, but as an obligatory return to society from all businesses.   As a bank, HNB’s management tried to practice this view, through the GP programme, by trying to facilitate economic inclusiveness in rural Sri Lanka, through micro lending. GP responded to a pressing market gap in Sri Lankan society, at a time when rural economies and rural Sinhala speaking societies were underserved, due to the premise of being higher risk and largely unexplored financial markets. However, in practice the idea exceeded expectation and the programme is now recognised for its effectiveness by agencies such as the World Bank and many others.

Think long term, think out of the box

Abeywickrema maintains the key to success, in the case of both GP and School Banking, is the bank’s innovative approach, which was pegged on the concept of long term sustainability and strategic and tactical integration.  Instead of approaching the project as a short term, one off, charitable venture, the bank opted for a long term commitment.  This meant pumping precious resources into the projects, without seeing returns for at least five years. The bank also fully immersed the programmes into its overall operations. This was also about real life application of CSR innovation. Companies need to be creative in how they leverage their strengths to generate stakeholder value through CSR. HNB met this criterion unconsciously, without tagging their efforts as innovative CSR.

To do this, HNB’s then CEO, Wijetilleke, enlisted the full support of HNB’s board and top management for the projects. With full backing of the board of directors, HNB went the whole hog to make it work. It leveraged all its assets and entire branch network, including new branches over the years, to support the programmes, until they became self sustaining.

“That,” says   Abeywickrema, “is commitment.” “Today CSR is a designer word. It’s like a feather in the cap. That’s not enough. You have to go for the long term, not try to decorate the balance sheet over the short term.”

As Abeywickrema sees it, CSR has to be embedded into the very core of business operations, making it “a part of the DNA of the business.” To do this HNB included its CSR projects in its overall business planning at strategic and operational levels and ensured the programmes were supported from the top down.

“That’s why I call it corporate commercial responsibility (CCR), because it has to be part of your body of operations or the DNA of the company,” says Abeywickrema. “After we decided on the GP concept we operationalised it by starting GP units in villages using our then existing branches. Each time we added a new branch, as part of the overall bank operations, GP services were added on to the new location.  We also recruited people with an agriculture background and trained them as GP Upadeshakas (GPUs). They are called updeshakas because they are not money lenders. They bring total financial solutions to people. We also ensured a clear career growth path for the GPUs,” explains Abeywickrema.

The GP programme has been positioned to focus on the three upper layers of the poverty pyramid that applies to the self employed, the entrepreneurial and the near poor. Start up enterprises account for about one third of the GP micro loans.  However, as Aberwickrema points out, many GP borrowers graduate out of the micro segment after the initial financial support. With these micro ventures taking off the ground, they become small and midsized business customers of the bank within a few years.  Some have now grown into “big customers” of the bank. “About three years ago we financed a guy in Puttalam, with Rs 7,000, to grow kankun. He had a small plot of land. During the past three years we continued to finance him. Today he has 15 acres of kankun, five lorries and employs 50 people.”

When the programme was introduced in mid 1989 the bank started with 13 GP units in Kurunegala, Anuradhapura, Galle, Colombo, Vavuniya, Gampaha, and Kandy. Today the service has spread island wide and provided access to banking services to enhance incomes and diversify risks of rural, agricultural households by providing working  capital and equipment financing to start micro enterprises. The pioneering GP advisors, who were known as barefoot bankers, for their role in getting down to grass root agricultural households, promoted HNB’s banking services and also gathered information on non-farm micro enterprises and small scale business projects that were suitable for financial support.  This bottom up system helped broad base HNB’s involvement in the local economy and also made HNB a trusted household name from one end of the country to the other.

Since late 1995 the GP programme has started experimenting with group lending methodologies by adapting the traditional shramadana practice in Sri Lankan rural communities, into modern banking systems. In Ambalantota for instance, the GPU has aligned with the Women’s Development Federation to use the group lending method, to finance micro enterprises by women.

Short sighted, short lived   

However, Aberwickrema notes that application of concepts such as sustainability is difficult with existing financial measurements that tend to focus on the short term. This short term view compels managers and boards of directors to become short sighted and unimaginative.

“The problem is the stereotypical financial analysis and measurement systems. Do directors have any data about the impact on the planet when they talk about profits the company made? Do they see a report on people or how much contribution they made to relieve poverty? Do they check on inclusion of women, opportunities for youth, for regional inclusiveness?  We don’t do this kind of assessment,” points out Abeywickrema.

The short term financial measurement system creates impetus for short term action, instead of being long term and sustainable.  “You can’t talk triple bottom line for one or two years. We need KPIs that justify long term sustainability. Our KPIs and financial reporting methods measure year-on-year performance. When the CEO is appointed for 3 – 5 years he has a short term to show performance,” says Abeywickrema.

Despite these difficulties the world’s top companies are lining up to list in sustainability indices such as  the Dow Jones Sustainability Index (DJSI), the FTSE4Good and the Calvert Social Index. These indices are not only a sign of paradigm change in corporate management but are also huge value and prestige factors.  The DJSI that was introduced as recently as 1999, is managed by Dow Jones Indexes and Sustainable Asset Management, a Swiss international investment company. Similarly, the FTSE4Good Index launched in 2001, by the British FTSE Group, also evaluates stocks based on a range of CSR criteria. The Calvert Social Index, created by Calvert Investments, an investment management company in the US,  is a benchmark of large companies on the basis of social responsibility towards the environment, workplace issues, product safety, community relations, weapons contracting, international operations, and human rights.

HNB’s GP and school banking programmes can be taken as working examples of CSR that works. The returns of well managed CSR programmes do materialise – over time. Although commercial banks traditionally make money in the short term, Gami Pubuduwa, was a drain on the bank for the first five years, as was the  school banking programme.  In fact, the bank incurred higher costs, than returns, because of the two programmes. “So the first 5 years only brought the bank an image benefit and did not make financial sense. It would take a-more-than-five-year balance sheet to show the positive impact on KPIs,” notes Abeywickrema.

But  today, GP and school banking  have become very material to the bank. The bank has 170 school banking units in 170 locations across the country and about 150 mobile operations. So HNB is now present in over 350 schools in the country. The programme has also trained about 35,000 students on banking, leadership and management over the last 20 years or so. By now, nearly Rs 7 billion in deposits, as savings of school children, are with HNB and the bank has about Rs 6 billion micro finance loans earning fairly good returns.  “But many banks do not want to get into this type of activity because it messes up their yearly ratios. That is why I believe this kind of CSR required multiple stakeholder engagement,” says Abeywickrema.

The involvement and commitment of key stakeholders such as the board, top management and major shareholders can result in long term, more meaningful CSR programmes. In Sri Lanka, businesses should also be aware of the social changes stemming from access to information. The country is seeing a better informed generation emerging, with a heightened consciousness about making profits in an environmentally and socially friendlier fashion. This is a trend local businesses should pay heed to, as the purchasing power of the average Sri Lankan consumer improves. With time, Sri Lankan consumers, like consumers in the west, are going to demand higher and better standards of corporate behaviour and by the looks of things this may happen sooner than later.

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