The Interaction of Companies with Local Communities

Social responsibility in international business has been the topic of much debate since the UN began studying the impact of multinational corporations on local business and local environments. This article by Alejandro Gorbato addresses more recent considerations of both public international law (including the UN and other public intergovernmental bodies) and more local considerations of Argentine mining law as an example of social responsibility. The author offers a dialogue on the interplay of prudent international business practices and compliance with emerging international and national laws governing “social responsibility” and “sustainability” in international investment and commerce.(Spanish and French versions also available)

The Interaction of Companies with Local Communities

Current Challenges
The global social community currently values not only the commercial success of a company, but also its respect for human rights and the activities that the company develops regarding the promotion of the welfare of its workers and the communities in which it operates.

The company cannot fail to consider, in the evaluation of a project, that there are individuals or interested parties (“stakeholders”) that are affected directly and/or indirectly by the planned project and that they have the possibility to affect the development of the business, and obviously its “value “.

It has also changed the relationship between governors and the governed mainly by the loss of credibility of rulers that caused a serious crisis of political representation on a global scale. This has facilitated direct dialogue between the company and the community in which it operates. These changes have involved the loss of validity of certain old-school theories and views that understood that solving social problems was an exclusive task for the government, so that managers of private companies who spent money on social activities acted irresponsibly (Milton Friedman,” The social responsibility of business is to increase profits”).

Developments in International and National Law
These changes in the relations between the company and the community were reflected, among others, in various international conventions such as “The Universal Declaration of Human Rights (UN, 1948) which has constitutional status in Argentina and the Convention concerning indigenous or tribal peoples (ILO, 1989), also ratified by Argentina.

However, the significant change comes from the so-called “Global Compact” (Davos, 1999) which provides, among others, the following principles: the need for environmental conservation, the respect for human and labour rights, the fight against corruption and the creation of a global corporate citizenship to reconcile commercial and social interests.

Companies that adhere to the Global Compact assume the voluntary commitment to inform the community about their activities, through sustainability reports that are made under guidelines established by the Global Reporting Initiative (GRI), that is to say, implementing a policy of corporate social responsibility (CSR).

Corporate Social Responsibility
CSR links the fate of the company to the environment where the project intends to be developed and involves a voluntary commitment to the sustainability of the activity through a permanent dialogue with “stakeholders”. This concerns raising the standard of social development and respect for human rights in a global framework of quality and sustainability.

When CSR initiatives are developed and carried out strategically, they not only deliver value to the recipients, but also strengthen the reputation of the companies themselves, their brands, products and services. The reputation of a company in its location and its image certainly influences its competitiveness, as well as its power to lobby, which means it can then count on the support of the community in which it operates.

There is no CSR prescription that is useful for every company and/or business, however, it has to adapt to both the sector in which the company operates, as well as the environment in which the project will be developed (“tailor made”).

Sectorial initiative: “International Council on Mining and Metals’ (ICMM)
The initiative arose from the major mining companies for the purpose of improving the social standing of the activity through the establishment of “good practices” that companies should meet.

This initiative involves operating responsibly and with minimal environmental impact (“Mining, Metals and Sustainable Development”, 2003).

In addition, companies must act ethically, respecting the local cultures and customs, and doing everything necessary for the conservation of biodiversity, the reuse and recycling of materials, as well as treating employees well and training them.

The establishment, by the company, of a certain communication policy, fluent and appropriate for the community and “stakeholders”, is a fundamental tool to prevent and/or minimize conflicts.

Companies will not only prepare their financial balance sheets, but the results of economic, social and environmental statements.

The Emergence of New Players in CSR
In recent years, mandatory state acts have been adopted, as is the case of the Prior Commitment of Mining Companies for the Development of Mining Activities (Peru, 2003) that establishes procedures to be followed by mining companies to carry out exploration and exploitation activities of minerals, in coordination with the public and to prevent damage to the environment.

Also noteworthy is the power of consumers and NGOs which has been seen in specific cases that have seriously affected companies.

CSR has also increased by shareholder activism through organizations such as the “Interfaith on Corporate Responsibility” (American organization composed of over 275 institutional investors from the Catholic, Protestant and Jewish communities). Pension funds have been forced to adopt ethical and/or ecological criteria in their investments, and so on.

Financial and insurance sectors have not been strangers to the evolution of CSR by adopting national government agencies (i.e.: EDC of Canada) and multilateral lending institutions (i.e.: World Bank) CSR requirements that must be met by petitioners of credits and/or insurance as a condition for granting.

“Social License” and “Social Consent”
Social License is the tacit approval of the business by the community affected. It is a continuous process of communication between the company and the community in establishing a policy: to do all that is promised.

This is not an administrative process that is based on compliance with legal norms, rather in the recognition and acceptance of cohabitation.

Social License arises in a context of world crisis of representation and credibility: people question much of what their leaders say and they themselves want to check the compliance with the law by the Company.

While “social license” is consistent with CSR, corporations often do not accept the concept of “Social Consent” of the community.

Companies understand that there is a significant difference between “Social license” and “Social Consent”, as they believe that the latter implies the recognition of more powers for the social community affected by the project. Companies fear that such a community becomes a “partner” instead of someone who must be “convinced and seduced” by the project and investments to be made.

Causes and perspectives of the development of CSR
The current boom in CSR is mainly related to the power consumers have in the market rather than a social awareness by companies and their managers.

According to supranational entities like the World Bank and the ILO, the fear of companies of “Social Consent” is unfounded because a right to veto is not given to the community affected by the investment, only a significant importance to their views on the project.

The CSR issues in foreign direct investment likewise manifest themselves in outsourcing and captive sourcing strategies of multinationals. In outsourcing, foreign buyers of local services can look at the CSR consciousness and commitments of local providers of “global services” as an extension, through the global supply chain, of the buyers’ own CSR initiatives. In the captive sourcing scenario, the CSR consciousness applies both to foreign investment and to global sourcing.

The challenge for the entrepreneur now is to make financially profitable investments that minimize the risk of the project and its acceptance by the affected local communities and stakeholders, so as to ensure the viability of the project in the long term.

About the Author:
Alejandro Gorbato is an Argentine lawyer practicing with Gorbato y Associados in Buenos Aires. He advises foreign companies on in-bound investments and new venture formation as well as international commercial law. He studied law in France as well as in Argentina. He is a member of a network of international law firms.